CSR, Sustainability, Ethics & Governance

Series Editors: Samuel O. Idowu · René Schmidpeter

Paolo Taticchi
Paolo Carbone
Vito Albino Editors

Corporate
Sustainability
CSR, Sustainability, Ethics & Governance

Series Editors

Samuel O. Idowu, London Metropolitan University,

Calcutta House, London, United Kingdom
René Schmidpeter, Hochschule Ingolstadt, Ingolstadt, Germany

For further volumes:

http://www.springer.com/series/11565
ThiS is a FM Blank Page
Paolo Taticchi • Paolo Carbone • Vito Albino
Editors

Corporate Sustainability
Editors
Paolo Taticchi Paolo Carbone
Royal Docks Business School Department of Electronic and Information
University of East London Engineering
London, United Kingdom University of Perugia
Perugia, Italy

Vito Albino
Department of Mechanics, Mathematics
and Management
Politechnic University of Bari
Bari, Italy

ISBN 978-3-642-37017-5 ISBN 978-3-642-37018-2 (eBook)

DOI 10.1007/978-3-642-37018-2
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To Eva, Gaetano, and Francesca
Vito Albino
ThiS is a FM Blank Page
To Ina, Andrea, Alessandro and Riccardo
Paolo Carbone
ThiS is a FM Blank Page
This book is dedicated to:
my wife, who proceeds with me in life and
supports me with her love,
my parents, for sustaining me in all the
difficult moments of the academic career,
Piero Lunghi, a great friend who transferred
me passion for working and ambition in life.
Paolo Taticchi
ThiS is a FM Blank Page
Preface

Sustainability is one of the key issues of today’s society as confirmed by the

increasing attention of governments, media, academics and industry.
A quoted definition of sustainability and sustainable development (SD) is that of
the Brundtland Commission of the United Nations: “sustainable development is
development that meets the needs of the present without compromising the ability
of future generations to meet their own needs”. Such a definition leads directly to
the three pillars of sustainability, which are the economical, social and environ-
mental dimensions. The concept of sustainability is therefore close to the concept of
“quality of life”.
In fact, referring to a new vision of human well-being as represented by the
quality of life (health status, education and skills, environmental quality, etc.) and
the material living conditions (income, jobs, housing, etc.) of humans, the idea of
sustainability is related to maintaining well-being over time. This is possible if
different types of capital are preserved: natural, economic, human and social.
Therefore, sustainable development has to maintain and enhance such capitals
avoiding the pure exploitation of resources.
In the context of sustainable development (SD), businesses that are often
referred as part of the problem can be part of the solution. As a consequence of
that, world academics with different backgrounds (e.g. strategy, operations,
accounting, supply chain, and technology) are today dealing with sustainability
trying to understand how this affects the traditional way of doing business, and, as
well, how traditional businesses are affected by sustainability.
The topic of business sustainability is multidisciplinary in nature, and its com-
plexity calls for putting in place a wide variety of research approaches, such as
action research, case studies, surveys, model development, etc.
Models and tools are needed to assess current sustainability of businesses, define
areas of improvement and drive initiatives. Sustainability measurement initiatives
add the necessary knowledge needed to verify programme effectiveness and to
provide objective information for guiding strategic actions.

xi
xii Preface

This book intends to give the state of the art of sustainable-corporations-related

topics under a number of perspectives, which include: economy, finance, measure-
ment and reporting, organizing for sustainability, green products, green buildings
and IT.
Nowadays, it is possible to affirm that sustainability is a new consolidated
discipline in business and management that encompasses and gives more structured
support to a large diversity of businesses.
The research value of the chapters provides good insights to address future
research and define a proper research agenda for the coming years.
Further, the relevance of the topics addressed makes the book or the individual
chapters an interesting read for academics, practitioners, consultants and more
generally, for people interested in business evolution and sustainability.

Politecnico di Bari, Italy Prof. Eng. Vito Albino

Università di Perugia, Italy Prof. Eng. Paolo Carbone
University of East London, UK Ass. Prof. Paolo Taticchi
Acknowledgements

The editors gratefully acknowledge the chapters’ authors for their contributions.
Further, the editors would like to thank Prof. Lawrence Chiarelli, Chairman of
the Civil Engineering Department at the Polytechnic Institute of New York Univer-
sity, USA, for facilitating the organization of the 3rd and 4th International Summer
School and Conference on Sustainability of Corporations. In fact, the events
promoted research discussions in which majority of the contribution of this book
were developed.
The editors acknowledge the Fondazione Cassa di Risparmio di Perugia that
sponsored some of the researches presented in this book.

xiii
ThiS is a FM Blank Page
Contents

Green Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Vito Albino
Industrial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Flavio Tonelli, Steve Evans, and Gian Carlo Cainarca
Carbon Emissions Management and the Financial Implications of
Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Janek Ratnatunga and Kashi R. Balachandran
Sustainability and Business at a Crossroads: The Idea of Positive
Investments in Creating Shared Value . . . . . . . . . . . . . . . . . . . . . . . . 89
Mariela M. Vargova
Integrating Sustainability in Capital Budgeting Decisions . . . . . . . . . . 103
Marinilka Barros Kimbro
A Study of Consumer Attitudes and Behaviour Towards Sustainability
in Bradford, UK: An Economical and Environmentally Sustainable
Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Zahid Hussain and Jasdeep Singh
Setting Managing Sustainability Goals . . . . . . . . . . . . . . . . . . . . . . . . 157
David Schatsky
Environmental Management Systems: Enabling Tools Towards
Sustainability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Luca Cagnazzo, Emanuele Raggi, and Paolo Carbone
The Green Option Matrix to Characterize Green Products and
Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Rosa Maria Dangelico and Pierpaolo Pontrandolfo

xv
xvi Contents

Sustainability Measurement and Reporting: Impacts on Finance,

Stakeholders Communication and Internal Measurement
Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Paolo Taticchi
Sustainable Use of IT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Zahid Hussain and Mohammed Addris Bostan
The Green Building Revolution: Advancing Sustainability
at Exponential Speed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Jeffrey S. Seigel
Existing Buildings’ Energy Upgrade: An Economical
and Environmentally Sustainable Opportunity . . . . . . . . . . . . . . . . . . 265
Anna Laura Pisello and Franco Cotana
Contributors

Vito Albino Politecnico di Bari, Bari, Italy

Kashi R. Balachandran New York University, New York, USA
Mohammed Addris Bostan University of Bradford, Bradford, UK
Luca Cagnazzo Università di Perugia, Perugia, Italy
Gian Carlo Cainarca Università di Genova, Genova, Italy
Paolo Carbone Università di Perugia, Perugia, Italy
Franco Cotana Università di Perugia, Perugia, Italy
Rosa Maria Dangelico Università di Roma – La Sapienza, Rome, Italy
Steve Evans Cambridge University, Cambridge, UK
Zahid Hussain University of Bradford, Bradford, UK
Marinilka Barros Kimbro Seattle University, Seattle, USA
Anna Laura Pisello Università di Perugia, Perugia, Italy
Pierpaolo Pontrandolfo Politecnico di Bari, Bari, Italy
Emanuele Raggi Università di Perugia, Perugia, Italy
Janek Ratnatunga University of South Australia, Adelaide, Australia
David Schatsky Green Research, New York, USA
Jeffrey S. Seigel New York University, New York, USA
Jasdeep Singh University of Bradford, Bradford, UK
Paolo Taticchi University of East London, London, UK
Flavio Tonelli Università di Genova, Genova, Italy
Mariela M. Vargova Rockefeller & Co., New York, USA

xvii
Green Economy

Vito Albino

1 Introduction

In the last decade significant warnings about the health of the planet were stated
(e.g. IPCC 2007). At the same time a large debate about the future of Kyoto
Protocol rose since USA made decision to not ratify the Agreement and some
countries like China were emerging as new manufacturing (and polluting) poles of
the world. As the financial turbulence arrived, the attention of the governments and
of the public opinion shifted towards this new crisis. 2009 was marked by the
convergence of several global crises. Around the world, people suffered the
consequences of financial and economic turmoil, with fluctuating food prices and
shortages (FAO 2010), and energy market insecurity. Governments put together
immense economic stimulus packages. The economic, food, and energy crises did
not unfold in isolation from other environmental and social challenges. They are
linked in many ways to continuing biodiversity loss, ecosystem degradation, and
climate change. Then, more determined steps are needed to protect the ecosystems
that support economic growth and sustain life on earth, as well as to eradicate
extreme poverty, i.e. to meet the Millennium Development Goals (UN 2011).
At present, we realize that the economic model pioneered by today’s industrial
countries is not viable for the world as a whole. In fact, today’s economy is
profoundly out of balance with the world’s ecological resource system. Solving
environmental problems can entail substantial costs for some industries even
though it will create thousands of new companies and millions of jobs, laying the
foundation for the transition to a green economy and growth.

V. Albino (*)
Department of Mechanics, Mathematics and Management, Politecnico di Bari, Viale Japigia
182, 70126 Bari, Italy
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 1
DOI 10.1007/978-3-642-37018-2_1, © Springer-Verlag Berlin Heidelberg 2013
2 V. Albino

Moreover, the idea of development is now under discussion as the financial and
economic crisis has demonstrated that we need new values and approaches. As Sen1
(UNDP 2011a) suggests: “Human development, as an approach, is concerned with
what I take to be the basic development idea: namely, advancing the richness of
human life, rather than the richness of the economy in which human beings live,
which is only a part of it”. Then, humans must not be neglected in any reasoning
about development. In the 2011 Human Development Report (UNDP 2011b) the
joint challenge of sustainable and equitable progress is the major focus as there is a
mutual relationship between environmental degradation and inequality. This strong
commitment to focus both at humans and nature has been shown by the General-
Secretary of UNESCO, Irina Bokova (UNESCO 2011): “Sustainable growth must
be inclusive, it must be socially equitable, and it must protect our ecosystems and
climate. The mantra of ‘grow today, clean up later’ can no longer stand – for
developed or developing countries. The time when we could put off difficult
choices is over. There are no more shortcuts. We must build inclusive, green
societies and economies by investing in human development and social capital.
New challenges require innovative solutions, which must harness also indigenous
knowledge for sustainable development. These will be born from new ways of
thinking and attitudes by people of all ages and from all walks of life. No society
can afford to leave anyone aside. Green societies must allow women and men to
contribute equally in leading and building a more sustainable future. We need a
change of culture to tackle climate change”.
The next UN Conference on Sustainable Development (Rio+20), to be held in
Rio de Janeiro, Brazil, from 4 to 6 June 2012, offers an opportunity to reset the
world on a sustainable development path. The two themes of the Conference are a
green economy within the context of sustainable development and poverty eradica-
tion, and the institutional framework for sustainable development.
The transition to a sustainable and socially equitable economy, i.e. a green
economy, can shape the future of the next generation, in particular, in terms of
jobs (EC 2011a; UNEP/ILO/IOE/ITUC 2008).
Successful green economies will require visionary systems thinking and smart,
effective government regulations and economic incentives. It is a change in our
culture and in the way we think. At stake are our future and the health of the planet
on which the economy depends.
In the next section, we will describe the conceptual pillars supporting the
development of a green economy. Subsequently, we will present the definition of
green economy and the performance indicators required to evaluate development
progress and policy effectiveness.

1
See also (Anand and Sen 1996, 2000; Sen 1999).
Green Economy 3

2 Towards a Green Economy

Today more than ever, in the context of climate change and world economy
adjustment, it has become clear that our global community has to adopt more
sustainable lifestyles to both reduce the use of natural resources and greenhouse
gas emissions moving towards low-carbon societies and green economy (UNEP
2011). This is crucial in order to decouple economic growth from the environment
exploitation and degradation, in both developing and developed countries, as well
as to create the opportunity for the poor to meet their basic needs. In fact, in many
countries social inequality, often caused by economic disparities in the distribution
of economic assets and income, is discriminating people and affecting human
dignity; and large economic and social disparities may lead to social instability,
thus damaging economic development.
In the last years the debate about the concept of a new and green economy has
dramatically grown. Several reasons drive the political and academic attention to
consider a new economy and society based on a different set of principles and
values. Some of these reasons have emerged since the Rio Conference, that has
been held in 1992 in Rio de Janeiro and is known as the Earth Summit II. During the
Opening session, Maurice Strong, the Secretary General of the Conference, gave
the introductory talk stating2 that industrialized countries have “developed and
benefited from the unsustainable patterns of production and consumption which
have produced our present dilemma. It is clear that current lifestyles and consump-
tion patterns of the affluent middle class – involving high meat intake, consumption
of large amounts of frozen and convenience foods, use of fossil fuels, appliances,
home and work-place air-conditioning, and suburban housing – are not sustainable.
A shift is necessary toward lifestyles less geared to environmentally damaging
consumption patterns”.
Then, the economic model of industrial countries is not affordable for the world
as a whole because of its impact on the economy, environment, and social inequal-
ity. As stated in 1992 in Sect. 4.3 of Agenda 21,3 “the major cause of the continued
deterioration of the global environment are the unsustainable patterns of consump-
tion and production, particularly in industrialised countries, which is a matter of
grave concern, aggravating poverty and imbalances”.

2.1 Sustainable Development

Sustainable development is a pattern of resource use, that aims to meet human

needs while preserving the environment so that these needs can be met not only in
the present, but also for generations to come. The term was used by the United

2
http://theobamafile.com/_associates/MauriceStrong.htm
3
http://www.un.org/esa/dsd/agenda21/res_agenda21_04.shtml
4 V. Albino

Nations World Commission on Environment and Development that published “Our

Common Future”, also known as the Brundtland Report (Brundtland Commission
1987), from the name of the Chairman of the Commission, Gro Harlem Brundtland
who was the former Prime Minister of Norway. The Commission coined the famous
definition of sustainable development as the one that “meets the needs of the present
without compromising the ability of future generations to meet their own needs”.
The report was inspired by the results of the United Nations Conference on the
Human Environment (Stockholm Conference) which had introduced environmental
concerns to the development problem. The Brundtland Report placed environmen-
tal issues firmly on the political agenda; it aimed to discuss the environment and
development as one single issue.
This Report and the work of the World Commission on Environment and
Development were the base for the convening of the 1992 Earth Summit and the
adoption of Agenda 21, the Rio Declaration, and to the establishment of the
Commission on Sustainable Development.
The transition to more sustainable patterns of consumption and production is the
core of sustainable development. More specifically, referring to production
activities (agriculture, resource extraction, manufacturing) and to their impact on
the environment, sustainable production means4 the “creation of goods and services
using processes and systems that are non-polluting, conserving of energy and
natural resources, economically efficient, safe and healthful for workers,
communities, and consumers, and socially and creatively rewarding for all working
people”. The concept of sustainable production is relevant for all countries as both
developed and underdeveloped economies usually do not apply sustainable
productions. In particular, in industrially developed countries, a kind of “rebound
effect” has been observed. In fact, innovations have reduced industrial energy use
and emissions of specific pollutants. Ironically, efforts to improve the environmen-
tal compatibility of goods and services or to enhance their economic performance
have opened up opportunities to consume more of them and, thus, to negate the
benefit derived from the original improvements.
Sustainability encompasses all components of the production system. Goods and
services can be: (i) safe and ecologically sound throughout their life cycle; (ii) as
appropriate, designed to be durable, repairable, readily recycled, compostable, or
easily biodegradable; (iii) produced and packaged using the minimal amount of
material and energy possible (Dangelico and Pontrandolfo 2010). Processes are
designed and operated such that: (i) wastes and ecologically incompatible
by-products are reduced, eliminated or recycled on-site; (ii) chemical substances
or physical agents and conditions that present hazards to human health or the
environment are eliminated; (iii) energy and materials are saved, and the forms of
energy and materials used are most appropriate for the desired ends; (iv) work
spaces are designed to minimize any hazard.

4
Lowell Center for Sustainable Production, http://www.sustainableproduction.org/abou.what.php.
Green Economy 5

Then, all stages of the product lifecycle (from production of raw materials
through manufacture, use and disposal of the final product) economically, socially,
culturally, and physically benefit when sustainability principle is adopted. To move
towards a sustainable business the following actions can be adopted (Hawken
1993):
– Replace nationally and internationally produced items with products created
locally and regionally;
– Take responsibility for the effects they have on the natural world;
– Do not require exotic sources of capital in order to develop and grow;
– Engage in production processes that are human, worthy, dignified, and intrinsi-
cally satisfying;
– Create objects of durability and long-term utility whose ultimate use or disposi-
tion will not be harmful to future generations;
– Change consumers to customers through education.
Green innovation processes support sustainable business models also encourag-
ing resource efficiency, sustainable infrastructure, green jobs and better quality of
life. For instance, some business models are now changing. In particular, in the last
decade globalization transformed company’s supply chains selling products whose
components are manufactured and assembled in different continents. This approach
is now under careful evaluation since environmental and operational problems have
shown some weaknesses which ask for radically reinvent supply chains (see, for
instance, (Lee 2010; de Treville and Trigeorgis 2010)). Then, innovation can
accelerate the achievement of long-term sustainable development by reducing
future economic, environmental and social costs, strengthening economic competi-
tiveness and reducing poverty.

2.2 From Resource Constraints to Resource Efficiency

A major role in sustainability is played by the availability of resources. The

existence of some constraints for resources and their impact on the evolution of
the economic systems have influenced different economists. Thomas Robert
Malthus (1766–1834) has developed theories concerning population and its
increase or decrease in response to various factors. In his book An Essay on the
Principle of Population (Malthus 1996), published from 1798 to 1826, he observed
that sooner or later population gets checked by famine, disease, and widespread
mortality. Malthus considered epidemics, famines, or wars as events that masked
the fundamental problem of populations overstretching their resource limitations.5

5
“The power of population is so superior to the power of the earth to produce subsistence for man,
that premature death must in some shape or other visit the human race. The vices of mankind are
active and able ministers of depopulation. They are the precursors in the great army of destruction,
6 V. Albino

However, Malthus was not able to recognize the extraordinary role of science and
technology in the incoming industrial revolution. The progress of medicine and its
impact on the demographic dynamic, the fertility reduction of western families as a
rational choice since 1870 have strongly modified the context in which Malthus has
developed his theory.
Two hundred years later, the book The Limits to Growth (Meadows et al. 1972)
echoes some of the concerns and predictions of Malthus, but its impact was
impressive as 1 year later the Kippur War demonstrated how the world was
vulnerable to oil price shock and crisis and how relevant can be natural resources
for the world economy. In the book the consequences of a rapidly growing world
population and finite resource supplies were analyzed. The research was
commissioned by the Club of Rome to build a model to simulate the interactions
between the Earth’s and human systems. Five variables were examined in the
original model, on the assumptions that exponential growth accurately described
their patterns of increase, and that the ability of technology to increase the avail-
ability of resources grows only linearly. These variables were: world population,
industrialization, pollution, food production and resource depletion. The authors
intended to explore the possibility of a sustainable feedback pattern that would be
achieved by altering growth trends related to the five variables. The purpose of the
research was not to make specific predictions, but to explore how exponential
growth interacts with almost finite resources. Because the size of resources is not
known, only the general behavior was explored.
Many prominent economists, scientists and political figures criticized The Limits
to Growth. They attacked the methodology, the model, the conclusions, and the
rhetoric behind the project. They stated that technology could solve all the problems
the book was concerned about, but only if growth continued apace. By stopping
growth too soon, someone warned, the world would be “consigning billions to
permanent poverty”. The main limit of The Limits to Growth lies on the fact that
population, capital and pollution grow exponentially in all models, but technologies
for expanding resources and controlling pollution are permitted to grow, if at all,
only in discrete increments. In the successive decades high values of innovation rate
showed that it is not easy to build reliable forecast for this variable. Twenty years
later a new book, “Beyond the Limits” (Meadows et al. 1992), has been published to
update the modeling of the consequences of a rapidly growing global population.
The authors addressed many of the criticisms of the previous book, but still they
caused controversy and mixed reactions.
Successively, the concept of resource efficiency emerged as the driver for
continuous progress. The Club of Rome promoted a new research whose results
have been published in the book “Factor Four: Doubling Wealth – Halving

and often finish the dreadful work themselves. But should they fail in this war of extermination,
sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their
thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine
stalks in the rear, and with one mighty blow levels the population with the food of the world”
(Malthus 1996).
Green Economy 7

Resource Use” (von Weizsäcker et al. 1996). The main conclusion of this research
is that it is possible to increase efficiency in the use of resource by a factor equal to
four. Several examples are provided to show how resource efficiency can be the key
to deal with the problem of sustainable development.
Tracking production and consumption patterns is the first step in management
aimed at optimizing resource efficiency. A better understanding of material and
energy flows will help meet the challenges associated with economic growth,
habitat destruction, pollution, and climate change.
In the last few decades, awareness that our growth-oriented society may be over-
reaching the Planet’s carrying capacity has been increasing. Through the develop-
ment of interdisciplinary perspectives, the cumulative environmental effects of
human activities are becoming more evident.
The fundamental issue addressed by resource efficiency is how to improve the
management of both production and consumption. Poor management contributes to
natural resource depletion, ecosystem destruction, pollution, climate change, and
waste of materials. Resource efficiency employs a variety of approaches to reduce
resource use and environmental impacts per unit of production, trade, or consump-
tion over the entire life cycle of goods, services, and materials.
Industrial ecologists and material chain analysts examine processes on many
different scales. Some compare the delivery and consumption of industrial
materials, and the accumulation of by-products, to the metabolism of living entities
(Ayres 2008; Haberl et al. 2008; Korhonen 2001; Krausmann et al. 2008).
According to this approach, growth in industrial metabolism is a major driver of
global environmental change (Ayres and Warr 2009). Managing projected supply
and demand is the objective of sustainable consumption and production, and of
resource efficiency strategies (Jackson 2009). Reducing global materials use, or at
least stabilizing it at the current level, will require major reductions of metabolic
rates, above all in industrialized countries. Gains in the efficiency of materials use
could contribute to a decoupling of economic growth from the use of both materials
and energy, but this would require effective and innovative management strategies
to avoid rebound effects (Bleischwitz et al. 2009; Krausmann et al. 2009; Lutz et al.
2004; OECD 2009).
Improved resource efficiency, which supports sustainable consumption and
production, has become an increasingly accepted objective for management
decisions, from the household to the international environmental governance levels.
Developed countries recognize that pursuing resource efficiency, and innovating to
minimize waste of materials and energy use, present opportunities to lower costs
and to share relevant technologies with developing countries (Jackson 2009; OECD
2009). For instance, in 2009 the “Global Market Transformation for Efficient
Lighting” initiative has been launched. It is accelerating a global market transfor-
mation towards energy-efficient lighting technologies, and then the development of
a worldwide strategy to phase out incandescent bulbs, thereby reducing global
greenhouse gas emissions (UNEP 2009).
Governments, civil society, and the private sector could all take advantage of the
global economic slowdown to reorient their business plans and economic objectives
8 V. Albino

towards sustainable development, and to accelerate the transformation towards a

green economy and sustainable prosperity. For instance, to achieve a transition in
the energy and transport sectors towards the comparatively radical shifts in con-
sumption and production patterns that many experts consider necessary, implemen-
tation efforts need to begin as soon as possible (IEA 2009a, b).
Scientists working in a number of fields warn that we risk crossing the thresholds
that define “planetary boundaries” (Rockström et al. 2009). Understanding the
significance of these boundaries, and how to pull back and operate within safe
limits, will require continual refinement of analytical tools, drawing on the lessons
of the past, and the development of sustainable solutions to environmental
challenges such as decoupling of resource use and environmental impacts from
economic growth. Accepting limitations on use of the planet’s resources, and
improving our understanding of interactions among Earth systems, would make it
possible to implement solutions through sustainable resource management rather
than geo-engineered technological fixes (Read 2008).

2.3 Triple Bottom Line: Evaluating Social, Environmental

and Economic Issues

In a context of sustainable development, business accounting cannot be limited to

economic and internal aspects. Social, environmental and economic issues have to
be included when evaluating business impact. This approach has been proposed in
the 90’s as the “triple bottom line (TBL)” or the “people, planet, profit (3P)”. TBL
accounting means expanding the traditional reporting framework to take into
account ecological and social performance in addition to financial performance.
TBL was coined in 1994 by John Elkington (1994), co-founder of SustainAbility, a
consulting company. The 3P concept was proposed to Shell company by
SustainAbility. It was later expanded and articulated (Elkington 1997). In fact,
the TBL approach cannot be interpreted as simply traditional corporate accounting
profit (which nevertheless remains an essential starting point for the computation)
plus social and environmental impacts unless the profits of other entities are
included as a social benefit.
To improve accounting for social, environmental and economic issues, there are
several business excellence frameworks used around the world, including the
Baldrige Performance Excellence Framework in the United States, the EFQM
Excellence Framework in Europe, and the Australian Business Excellence Program
in Australia. These independent scoring methods can support monitoring and
measurement that can serve the many stakeholders that want to know about
performance for TBL.
Green Economy 9

2.4 Natural Capitalism and Human Development

Sustainable development points out that the environment and humans have to be
central in any project of future, but with a new perspective. Natural resources and
humans are not the means but the goal of development. Following this view, two
more important principles have been considered.
Lovins et al. (1999) introduced the term “natural capitalism” to describe a future
in which business and environmental interests increasingly overlap, and in which
businesses can better satisfy their customers’ needs, increase profits, and help solve
environmental problems all at the same time.
The natural capitalism is based on the concept that natural and human capitals
have to be included in the balance sheet as well as the economic one. Since nature is
rooted in biomes and people in communities, they cannot be shipped and traded like
money or goods without damaging them. Then, natural capitalism has strong
implications in the evaluation of globalization (Hawken et al. 1999).
Four principles are assumed in the natural capitalism: (i) increasing resource
productivity; (ii) redesigning industry on biological models with closed loops and
zero waste; (iii) shifting from the sale of goods (for example, light bulbs) to the
provision of services (illumination); (iv) reinvesting in the natural capital that is the
basis of future prosperity.
The first principle requires that production output is obtained using less
resources such as fuels, minerals, water. At the same time, products have to be
dematerialized and have to last longer.
The second principle is inspired to biomimetic production which closes the loops
in extraction and manufacturing and turns waste into value. Industrial symbiosis
(Korhonen 2001) is an example of such a production organization where a produc-
tion process use another process’ waste as primary input and so on.
For the third principle the manufacturer can lease the service of a good, without
selling it, and then this condition provides powerful incentives for durability,
quality, and reuse.
The reinvestment in nature, i.e. the fourth principle, means to restore and
enhance nature’s fecundity, boosting ecosystems’ ability to provide even more
food, fiber, and free ecological services, and hence to enhance life for all beings.
Referring to humans, the human development approach has been proposed in
part as a response to the growing criticism to the leading development approach of
the ‘80s, which presumed a close link between national economic growth and the
expansion of individual human choices. Human development is a development
paradigm that is about much more than the rise of national incomes. It concerns the
idea of future where people can develop their full potential and lead productive,
creative lives in accord with their needs and interests. People are the real wealth of
nations. Development is thus about expanding the choices people have to lead
valuable lives. This is about much more than economic growth, which is only a
means – if a very important one – of enlarging people’s choices.
10 V. Albino

Fundamental to enlarging these choices is building human capabilities, i.e. the

range of things that people can do or be in life. The most basic capabilities for
human development are to lead long and healthy lives, to be educated, to have
access to the resources needed for a decent standard of living, and to be able to
participate in the life of the community. Without these, many choices are simply not
available, and many opportunities in life remain inaccessible.
In seeking that something else, human development is rooted in human rights
and freedom. In pursuing capabilities and realizing rights, people must be free to
exercise their choices and to participate in decision-making that affects their lives.
Human development and human rights are mutually reinforcing, helping to secure
the well-being and dignity of all people, building self-respect and the respect of
others.
The economist Amartya Sen, Nobel laureate in 1998, provided the conceptual
foundation for the alternative and broader human development approach defined as
a process of enlarging people’s choices, and enhancing human capabilities and
freedoms. Then, human development is concerned with the advance of the richness
of human life rather than of the economy in which human beings live (Sen 1999).
Since 1990 the human development concept has been adopted to produce the
Human Development Reports published yearly under the auspice of the United
Nations Development Programme (UNDP). The idea of human development has
always been considered flexible and the concept of human development can evolve
over time and vary both across and within countries. Human development is related
to some issues currently considered the most important, namely: social progress
(access to knowledge, nutrition and health), economic growth, efficiency in terms
of resource use and availability, equity, participation and freedom (democratic
governance, gender equality, civil and political rights, and cultural liberty),
sustainability in ecological, economic and social terms, human security (jobless-
ness, famine, conflict, etc.).

3 Green Economy Definition

In a world at the same time demanding better lives for the global population and
requiring responses to the environmental problems, a dramatic change is needed.
Growth and development have to be sought improving human well-being,
providing decent jobs, reducing inequalities, tackling poverty and preserving the
natural capital upon which we all depend (EC 2011b).
All this cannot be based on slowing growth, but rather promoting the right kind
of growth. Such a growth can be sustained by a green economy that offers an
effective way of promoting sustainable development, eradicating poverty and
addressing emerging challenges.
A green economy (UNEP 2011) is “one that results in improved human well-
being and social equity, while significantly reducing environmental risks and
ecological scarcities. A green economy is an economy or economic development
Green Economy 11

model based on sustainable development and a knowledge of ecological econom-

ics. Its most distinguishing feature from prior economic regimes is direct valuation
of natural capital and nature’s services as having economics value (see6 TEEB and
Bank of Natural Capital) and a full cost accounting regime in which costs
externalized onto society via ecosystems are reliably traced back to, and accounted
for as liabilities of, the entity that does the harm or neglects an asset”.
A similar definition for green economy is provided by the OECD referring
specifically to the green growth. Green growth (OECD 2011a) is about “fostering
economic growth and development while ensuring that the natural assets continue
to provide the resources and environmental services on which our well-being relies.
To do this it must catalyse investment and innovation which will underpin sustained
growth and give rise to new economic opportunities”.
Green growth has thus several dimensions that have to be considered in order to
catch its deep and revolutionizing meaning. In particular, the sustainable and
inclusive growth is considered as a fundamental condition for a right kind of
growth. Then, a green economy can be thought of as one where growth is low
carbon, resource efficient, and socially inclusive. This growth should be driven by
public and private investments that reduce carbon emissions and pollution, enhance
energy and resource efficiency, and prevent the loss of biodiversity and ecosystem
services. These investments need to be catalyzed and supported by targeted public
expenditure, policy reforms and regulation changes. The development path should
maintain, enhance and, where necessary, rebuild natural capital as a critical eco-
nomic asset and as a source of public benefits, especially for poor people whose
livelihoods and security depend on nature.
Green economy is not just about the environment. Certainly, we must move to
find harmony with natural systems. But doing this requires human creativity, and
access to knowledge, and the widespread participation of everyone as an extension
of democracy. Social and ecological transformation have to go hand-in-hand.
Green economy and green politics both emphasize the creation of positive
alternatives in all areas of life and every sector of the economy. Green economy
does not prioritize support for either the public or the private sector. It argues that
both sectors must be transformed so that markets express social and ecological
values, and the state becomes merged with grassroots networks of community
innovation. For this to happen, new economic processes must be designed, and
new rules of the game written, so that incentives for ecological conduct are built
into everyday economic life. The state can then function less as a policeman, and
more as a coordinator. This is a very different kind of “self-regulation” than current
profit- and power-driven market forces. The basis for self-regulation in a green
economy would be community, and intelligent design which provides incentives for
the right things.

6
See http://www.teebweb.org for TEEB, i.e. The Economics of Ecosystems Biodiversity, and
http://bankofnaturalcapital.com/ for the Bank of Natural Capital.
12 V. Albino

Six sectors mainly characterize a green economy:

– Renewable energy (solar, wind, geothermal, marine including wave, biogas, and
fuel cell);
– Green buildings (green retrofits for energy and water efficiency, residential and
commercial assessment; green products and materials, and LEED construction);
– Clean transportation (alternative fuels, public transit, hybrid and electric
vehicles, car sharing and carpooling programs);
– Water management (water reclamation, greywater and rainwater systems,
low-water landscaping, water purification, storm water management);
– Waste management (recycling, municipal solid waste salvage, brownfield land
remediation like Superfund cleanup, sustainable packaging);
– Land management (organic agriculture, habitat conservation and restoration;
urban forestry and parks, reforestation and afforestation and soil stabilization).
Moving towards a green economy necessitates preserving and investing in the
assets of key natural resources. It also involves the proper valuation of natural
capital, and, in more general terms, a revision of the way in which we measure
growth and progress. In a green economy many challenges can be transformed into
economic opportunities, not only reversing negative environmental trends, but also
driving future growth and jobs. The green economy offers opportunities to all
countries, irrespective of their level of development and the structure of their
economies. While in many cases investments to move towards a green economy
can result in short-term win-win solutions, in other cases a medium term perspec-
tive will be needed, and transitional costs will have to be addressed, including
through “pro-poor” policies. Even though there is no “one-size-fits-all” model,
there are common challenges and solutions, and countries will benefit from
exchanging experience and improved international cooperation.
At the same time, moving towards the green economy does not start from zero.
There are already a number of strategies in place that countries can build on, such
as: climate change, biodiversity, sustainable consumption and production, research
and innovation, all of which can contribute to enabling a green economy. Future
national and international green economy strategies should build on and strengthen
these, as is happening in Europe 2020 Strategy, and recently in the roadmap for
moving to a competitive low carbon economy by 2050.
International organisations, including UNEP and the OECD, are promoting
green economy initiatives and green growth strategies. The International Labour
Organisation is developing programmes to support a socially fair transition towards
green, decent jobs. Jobs are green7 when they help reduce negative environmental
impact and ultimately lead to environmentally, economically and socially sustain-
able enterprises and economies. The G20 countries are also increasingly engaging
in the green economy agenda.

7
More precisely, green jobs are decent jobs (UNEP/ILO/IOE/ITUC 2008) that: (i) reduce con-
sumption of energy and raw materials; (ii) limit greenhouse gas emissions; (iii) minimize waste
and pollution; and (iv) protect and restore ecosystems.
Green Economy 13

Based on the above initiatives, to achieve the transition to a green economy we

need to address three interlinked policy dimensions (EC 2011b):
– Investing in the sustainable management of key resources and natural capital
(“what”);
– Establishing the right market and regulatory conditions (“how”);
– Improving governance and private sector involvement (“who”).
UNEP whose aim is to assist governments in “greening” their economies by
reshaping and refocusing policies, investments and spending towards a range of
sectors,8 supported the Global Green New Deal (Barbier 2009). Such a policy
response to the financial and economic crisis should make a major contribution to
reviving the world economy, saving and creating jobs, and protecting vulnerable
groups. It should promote sustainable and inclusive growth and the achievement of
the Millennium Development Goals, especially ending extreme poverty by 2015.
Also, it has to reduce carbon dependency and ecosystem degradation.

4 Performance Indicators

Measuring the true progress towards a green economy is not easy as different
aspects have to be considered. Governments are requested to develop reliable
indicators, and environmental and social accounting. However, measuring progress
requires comparable metrics and indicators to be in place (EC 2011b). Then, the
definition of a system of indicators able to build an environmental and social
accounting defined and agreed at the international level is needed. This system
has to be integrated with the economic accounting system through existing
initiatives such as the international system for integrated environmental and eco-
nomic accounting (SEEA), the UNDP (Human Development Report) and the
OECD (Measuring the Progress of Societies).
A number of organisations have been working to provide various forms of
indicators that can reflect the state of the environment and natural assets, well-
being and the quality of life. These indicators should be used alongside Gross
Domestic Product (GDP). However, only some of these indicators have so far been
used widely in communicating policy needs, such as the Ecological Footprint and
the Human Development Index.
United Nations should promote the transparency of national reporting and agree
on the use of robust indicators at national and at global level in order to measure this
wider sense of progress in addition to GDP.

8
Sectors such as clean technologies, renewable energies, water services, green transportation,
waste management, green buildings and sustainable agriculture and forests. More information are
available on the website www.unep.org/ greeneconomy.
14 V. Albino

4.1 Ecological Footprint

The Ecological Footprint (EF) is a measure of the impact of human demand on the
Earth’s ecosystems (Wackernagel and Rees 1996). It is based on a standard
measurement of a unit’s influence on its habitat caused by the process of consump-
tion and pollution. Human demand is compared with planet Earth’s ecological
capacity to regenerate. In fact, it represents the amount of biologically productive
land and sea area needed to regenerate the resources a human population consumes
and to absorb and render harmless the corresponding waste. For instance, a
country’s footprint (demand side) is the total area required to produce all the
materials (food, water, etc.) that it consumes, absorb the waste it generates, and
provide areas for its infrastructures (built-up areas). On the supply side, biocapacity
is the productive capacity of the biosphere and its ability to provide a flow of
biological resources and services useful to humanity (Moran et al. 2008).
Using this assessment, it is possible to estimate how much of the Earth (or how
many planet Earths) it would take to support humanity if everybody lived a given
lifestyle. For 2006, humanity’s total ecological footprint was estimated at 1.4 planet
Earths – i.e., humanity uses ecological services 1.4 times as fast as Earth can renew
them. Every year, this number is recalculated – with a 3 year lag due to the time it
takes for the UN to prepare and publish all the underlying statistics.
Today calculation standards are reliable to get comparable and consistent
measures. Then EF is widely used by scientists, businesses, governments, agencies,
individuals, and institutions working to monitor ecological resource use and sus-
tainable development.
By measuring the footprint of a population’s unit (i.e., individual, city, business,
nation, or all of humanity) its pressure on the planet can be assessed and the
ecological assets can be managed more wisely. Moreover, personal and collective
actions can support the transition towards a world where humanity lives within the
Earth’s bounds. This approach can also be applied to an activity such as the
manufacturing of a product or driving of a car. This resource accounting is similar
to life cycle analysis wherein the consumption of all resources (energy, raw
materials, water, etc.) is converted into a normalized measure of land area called
“global hectares” (gha).
Per capita ecological footprint is a means of comparing consumption and
lifestyles, and checking this against nature’s ability to provide for this consumption.
The tool can inform policy by examining to what extent a nation uses more (or less)
than is available within its territory, or to what extent the nation’s lifestyle would be
replicable worldwide. The footprint can also be a useful tool to educate people
about carrying capacity and over-consumption, with the aim of altering personal
behavior. Ecological footprints may be used to argue that many current lifestyles
are not sustainable. Such a global comparison also clearly shows the inequalities of
resource use on this planet. For instance, in 2007, the average biologically produc-
tive area per person worldwide was approximately 1.8 global hectares (gha) per
capita. The EF per capita for U.S. and Canada region was 7.9 gha, whereas for
Africa and Asia 1.4 gha and 1.8 gha, respectively (Table 1).
Green Economy 15

Table 1 EF and biocapacity for region (Data 2007, Source: www.footprintnetwork.org)

EF of
consumption Total biocapacity Ecological (deficit)
Region (gha/pers) (gha/pers) reserve (gha/pers) Population (millions)
Europe 4.7 2.9 (1.8) 730.9
Africa 1.4 1.5 0.1 963.9
Asia 1.8 0.8 (1.0) 4,031.2
US & Canada 7.9 4.9 (3.0) 341.6
Latin 2.6 5.5 2.9 569.5
America
& the
Caribbean
Oceania 5.4 11.1 5.8 34.5
World 2.7 1.8 (0.9) 6,671.6

Since 2006, a first set of ecological footprint standards exist that detail both
communication and calculation procedures. They are available at www.footprint-
standards.org and were developed in a public process facilitated by Global Foot-
print Network and its partner organizations.
The ecological footprint of some denotative countries of each region is reported
in Table 2 It is based on 2007 data from the Global Footprint Network published in
2010. The world-average ecological footprint in 2007 was 2.7 global hectares per
person (18 billion in total). With a world-average biocapacity of 1.8 global hectares
per person (12 billion in total), this leads to an ecological deficit of 0.9 global
hectares per person. If a country does not have enough ecological resources within
its own territory, then there is a local ecological deficit and it is called an ecological
debtor country. Otherwise, it has an ecological remainder and it is called an
ecological creditor country.

4.2 Human Development Index

As said before, the most basic capabilities for human development are to lead long
and healthy lives, to be knowledgeable, to have access to the resources needed for a
decent standard of living and to be able to participate in the life of the community.
The Human Development Index (HDI) is a summary composite index that
measures a country’s average achievements in three basic aspects of human devel-
opment: health, knowledge, and income. It was first developed by Mahbub ul Haq,
Amartya Sen and other leading development thinkers for the first Human Develop-
ment Report in 1990. Introduced as an alternative to conventional measures of
national development, such as GDP and the rate of economic growth, HDI is a new
way of measuring development by combining indicators of life expectancy, educa-
tional attainment and income into a composite index. The breakthrough for the HDI
was the creation of a single statistic which was to serve as a frame of reference for
16 V. Albino

Table 2 List of countries ordered by EF (Data 2007, Source: www.footprintnetwork.org)

EF Biocapacity Ecological remainder Population
Country (gha/pers) (gha/pers) (if positive) (gha/pers) (millions)
UAE 10.68 0.85
9.83 6.25
Denmark 8.26 4.85
3.41 5.45
United 8.00 3.87
4.13 308.67
States
Canada 7.01 14.92 7.91 32.95
Australia 6.84 14.71 7.87 20.85
Netherlands 6.19 1.03
5.16 16.46
Sweden 5.88 9.75 3.87 9.16
Norway 5.56 5.48
0.08 4.72
Spain 5.42 1.61
3.81 44.05
Saudi Arabia 5.13 0.84
4.29 24.68
Germany 5.08 1.92
3.16 82.34
France 5.01 3.00
2.01 61.71
Italy 4.99 1.14
3.85 59.31
UK 4.89 1.34
3.55 61.13
South Korea 4.87 0.33
4.54 47.96
Japan 4.73 0.60
4.13 127.40
Russia 4.41 5.75 1.34 141.94
Mexico 3.00 1.47
1.53 107.49
Brazil 2.91 8.98 6.07 190.12
Ukraine 2.90 1.82
1.08 46.29
Turkey 2.70 1.32
1.38 73.00
Argentina 2.60 7.50 4.90 39.49
South Africa 2.32 1.14
1.18 49.17
China 2.21 0.98
1.23 1,336.55
Nigeria 1.44 1.12
0.32 147.72
Bangladesh 0.62 0.38
0.24 157.75
Puerto Rico 0.04 0.14 0.10 3.95

both social and economic development. The HDI sets a minimum and a maximum
for each dimension, called goalposts, and then shows where each country stands in
relation to these goalposts, expressed as a value between 0 and 1. The components
of HDI are reported in Fig. 1.
The education component of the HDI is now measured by mean of years of
schooling for adults aged 25 years and expected years of schooling for children
of school going age. Mean years of schooling is estimated based on duration of
schooling at each level of education. Expected years of schooling estimates are
based on enrolment by age at all levels of education and population of official
school age for each level of education. The indicators are normalized using a
minimum value of zero and maximum values are set to the actual observed
maximum values of the indicators from the countries in the time series, that is,
1980–2010. The education index is the geometric of two indices.
Green Economy 17

Fig. 1 The components

of HDI

The life expectancy at birth component of the HDI is calculated using a

minimum value of 20 years and maximum value of 83.2 years. These are the
observed maximum value of the indicators from the countries in the time series,
1980–2010. Thus, the longevity component for a country where life expectancy
birth is 55 years would be 0.554.
For the wealth component, the goalpost for minimum income is 163 USD
(purchasing power parity, PPP) and the maximum is 108,211 USD (PPP), both
observed during the same time series and measured by Gross National Income9
(GNI) per capita instead of GDP per capita. The HDI uses the logarithm of income,
to reflect the diminishing importance of income with increasing GNI. The scores for
the three HDI dimension indices are then aggregated into a composite index using
geometric mean.
The HDI emphasizes that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone.
Then, HDI can also be used to question national policy choices, asking how two
countries with the same level of GNI per capita can end up with such different
human development outcomes. For example, the Bahamas and New Zealand have
similar levels of income per person, but life expectancy and expected years of
schooling differ greatly between the two countries, resulting in New Zealand
having a much higher HDI value than the Bahamas. These relevant contrasts can
directly stimulate debate about government policy priorities. These varied

9
GNI includes remittances and foreign assistance income, and then provides a more appropriate
economic picture of many developing countries.
18 V. Albino

Table 3 HDI for G20 Country HDI (2011) Country HDI (2011)
countries (Source: UNDP
2011b) Australia 0.929 Mexico 0.770
USA 0.910 Saudi Arabia 0.770
Canada 0.908 Russia 0.755
Germany 0.905 Brazil 0.718
Japan 0.901 Turkey 0.699
South Korea 0.897 China 0.687
France 0.884 South Africa 0.619
Italy 0.874 Indonesia 0.617
UK 0.863 India 0.547
Argentina 0.797

pathways to human development show that there is no single formula for sustain-
able progress and that impressive long-term gains can and have been achieved even
without consistent economic growth.
The Human Development Report 2011 (UNDP 2011b) is titled “Sustainability
and Equity: A Better Future for All”. In this report it is argued that urgent global
challenges of sustainability and equity must be addressed together. Policies at the
national and global level have to focus on these interlinked goals if some benefits
are expected for the world’s poor majority. Past Reports have shown that living
standards in most countries have been rising – and converging – for several decades
now. Yet the 2011 Report projects a disturbing reversal of those trends as environ-
mental deterioration and social inequalities continue to intensify, with the least
developed countries diverging downwards from global patterns of progress
by 2050.
The Report shows further how the world’s most disadvantaged people suffer the
most from environmental degradation, including in their immediate personal envi-
ronment, and don’t have political power. As a consequence, this condition makes
harder for the world community to reach agreement on needed global policy
changes. The Report also outlines opportunities for effective synergies in the
quest for greater equality and sustainability, especially at the national level. The
Report further emphasizes the human right to a healthy environment, the impor-
tance of integrating social equity into environmental policies, and the critical
importance of public participation and official accountability. In Table 3 the HDI
values for G20 countries are shown.
In Fig. 2 HDI and EF values are depicted for some countries showing significant
disparities among regions. This comparison points out that the progress towards the
green economy has to be measured with composite indices as different aspects need
to be evaluated at the same time.
Green Economy 19

Fig. 2 HDI versus EF for different countries (Source: UNEP 2011)

4.3 Towards a New System of Indicators

Through substantive analysis, the OECD pointed out some of the limits of official
statistics for measuring the progress of societies. Further impetus10 to the progress
measuring research was given by the Commission on the Measurement of Eco-
nomic Performance and Social Progress – also known as the Stiglitz-Sen-Fitoussi
Commission11 – convened by French President Nicolas Sarkozy with the participa-
tion of the OECD. This commission was motivated by the fact that economic
development measures need to be enhanced and a gap between the statistical
measurement of socio-economic phenomena and citizen perception of the same
phenomena exists. Moreover, GDP was considered an inadequate metric to gauge
well-being over time particularly in its economic, environmental, and social
dimensions, some aspects of which are often referred to as sustainability.
The actual relevance of the report is double with respect to the financial and
environmental crisis as metrics incorporating assessments of sustainability (e.g.

10
It is worthful to remember as one of the first impetus on the topic was the wonderful speech of
Robert F. Kennedy at the University of Kansas on March 18, 1968 (http://www.youtube.com/
watch?v¼77IdKFqXbUY).
11
The Commission was chaired by Joseph E. Stiglitz (Columbia University), Amartya Sen
(Harvard University) was Chair Adviser, Jean-Paul Fitoussi (Institut d’Etudes Politiques de
Paris and Observatoire Français des Conjonctures Economiques) was the Coordinator of the
Commission. Members of the Commission are renowned experts from universities, governmental
and intergovernmental organisations, in several countries (USA, France, United Kingdom, India)
and fields like social capital, physical and mental well-being, and happiness. The Commission held
its first plenary meeting on 22–23 April 2008 in Paris. Its final report has been made public on
14 September 2009. For more information visit the website: www.stiglitz-sen-fitoussi.fr/.
20 V. Albino

increasing indebtedness) would have provided a more cautious view of economic

performance, and market prices are distorted by the fact that there is no charge
imposed on carbon emissions; in fact no account is made of the cost of these
emissions in standard national income accounts.
The Commission (Stiglitz et al. 2009) concluded in September 2009 that a broad
range of measures and indicators about people’s well-being and societal progress
should be used alongside more standard economic measures such as GDP. As a
result of the Commission work, the significance of measuring well-being and
progress has been placed firmly on the political agenda at the very highest level,
as evidenced by such developments at the national (major initiatives in Australia,
Finland, France, Germany, Italy, Japan, Korea, New Zealand, Slovenia, Spain, the
UK, the USA) and the international level (G20, EU).
The most important distinction introduced by the commission refer to current
well-being and sustainability measure. Current well-being relates to economic
resources (e.g. income) and non-economic aspects of peoples’ life (e.g. what they
do and what they can do, how they feel, and the natural environment they live in).
Sustainability refers to whether the current levels of well-being can be sustained
over time and depends on whether stocks of capital that matter for our lives (natural,
physical, human, social) are passed on to future generations.
In particular, well-being is multi-dimensional as it is based on: material living
standards (income, consumption and wealth), health, education, personal activities
including work, political voice and governance, social connections and
relationships, environment (present and future conditions), insecurity of an eco-
nomic as well as a physical nature. Also, objective and subjective dimensions of
well-being are both important. Objective measures such as measures of people’s
health, education, personal activities and environmental conditions should be
improved; robust, reliable measures of social connections, political voice, and
insecurity that can be shown to predict life satisfaction should be developed.
Quality-of-life indicators in all the dimensions covered should assess inequalities
(across people, socio-economic groups, gender and generations).
Subjective well-being encompasses cognitive evaluations of one’s life such as
happiness, satisfaction, positive emotions (for instance, joy and pride), and negative
emotions (such as pain and worry); suitable measures should be developed.
The assessment of sustainability is complementary to the question of current
well-being or economic performance, and must be examined separately.
Sustainability requires the simultaneous preservation or increase in several stocks:
quantities and qualities of natural resources, and of human, social and physical
capital.
Referring to the need of more complete and reliable evaluation of the progress,
OECD is very active since long time ago. As recently sustained by the OECD
(2011a), green growth is about fostering economic growth and development while
ensuring that the natural assets continue to provide the resources and environmental
services on which our well-being relies. The measurement framework proposed by
the OECD (Fig. 3) thus permits the definition of four inter-related groups of
indicators (Fig. 4):
Green Economy 21

Economic activities Policies,

measures,
Production opportunities
Consumption Outputs Inputs
4
Households
Governments Income Labour
Goods& services Capital
Residuals Resources
Investments Multi-factor
productivity

3 1

Amenities, health & Pollutants Energy & raw materials

safety aspects waste water, land, biomass,air

Service functions Sink functions 2 Resource functions

Natural asset base

Fig. 3 Green growth: measurement framework (Source: OECD 2011a)

Fig. 4 Green growth indicators groups and topics (Source: OECD 2011a)

– Indicators monitoring the environmental and resource productivity of production

and consumption, to capture the need for efficient use of natural capital which is
rarely quantified in economic models and accounting frameworks;
– Indicators describing the natural asset base, as a declining asset base presents
risks to growth and sustained growth requires the asset base to be maintained;
– Indicators monitoring the environmental dimension of quality of life, capturing
the direct impacts of the environment on people’s lives, through e.g. access to
water or the damaging effects of air pollution;
– Indicators describing policy responses and economic opportunities, which can
be used to evaluate the effectiveness of policy in delivering green growth and
where the effects are most marked.
22 V. Albino

Fig. 5 Framework for OECD well-being indicators (Source: OECD 2011b)

They are complemented with generic indicators describing the socio-economic

context and characteristics of growth.
Indicators can be selected on the basis of criteria such as their policy relevance,
analytical soundness, and measurability. The selected set should be neither exhaus-
tive nor final and has to be considered flexible as countries can adapt it to different
national contexts.
Referring to the well-being indicators, OECD (2011b) provides some interesting
insights (Fig. 5). In particular, the material living conditions (or “economic well-
being”) determine people’s consumption possibilities and their command over
resources. While this is shaped by GDP, the latter also includes activities that do
not contribute to people’s well-being (e.g. activities aimed at offsetting some of the
regrettable consequences of economic development) while it doesn’t include
non-market activities that expand people’s consumption possibilities. Quality of
life, defined as the set of non-monetary attributes of individuals, shapes their
opportunities and life chances, and has intrinsic value under different cultures and
contexts.
The sustainability of the natural and socio-economic systems where people live
and work is critical for well-being to last over time. Sustainability depends on how
current human activities impact on the stocks of different types of capital (natural,
economic, human and social). However, suitable indicators for describing the
evolution of these stocks are still lacking in many fields.
Green Economy 23

5 Conclusions

In this chapter the concept of green economy is introduced referring to the main
principles inspiring it. Sustainable development, resource efficiency, triple bottom
line, natural capitalism and human development are recognized as the main con-
ceptual pillars supporting economic and social transition. In fact, green economy
results in improved human well-being and social equity, while significantly
mitigating environmental pressures and ecological scarcities. This can be achieved
if a change in the people culture will support smart, effective government
regulations and economic incentives.
The green economy offers opportunities to all countries, irrespective of their
level of development and the structure of their economy. However, for each country
the transition towards the green economy has to be based on a country-specific
model and the green growth has to be monitored in order to evaluate policy
effectiveness and development progress.
Ecological footprint and human development index are identified as the most
known indicators that can be used alongside Gross Domestic Product. However, the
need for a new system of indicators is outlined referring to the current debate about
the measures of human well-being and its sustainability related to the preservation
of different types of capital: natural, economic, human, and social.

Acknowledgments The author’s acknowledgements are due to:

POR Puglia 2000–2006 for the grant CIP_PE109.
H2CU (Honors Center of Italian Universities) for supporting the International cooperation
among the authors of the book.

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Industrial Sustainability
General Guidelines and Implications

Flavio Tonelli, Steve Evans, and Gian Carlo Cainarca

1 The Wider Context and the Scale of Challenge

1.1 Planet/Eco-System Context and Short Term Historical

View of Industry

Given the body of evidence demonstrated in the previous chapters, it is quite

evident that the current trajectory of the human ecological footprint is not sustain-
able. Our understanding of the Earth’s environment and the negative impact of
industrial activity on it raises concerns about the way we design and build the
techno-sphere today. Since 1700, the volume of goods traded internationally has
increased some 800 times. In the last 10 years, the world’s industrial production has
increased more than 100-fold. In the early 1900s, production of synthetic organic
chemicals was minimal; today, it has reached over 225 billion pounds per year in
the US alone. Since 1900, the rate of global consumption of fossil fuel has increased
by a factor of 50. What is important is not just the numbers themselves, but their
magnitude and the relatively short historical time they represent (for further infor-
mation see Graedel and Allenby 2009). These dynamics pose unparalleled
challenges for existing industrial systems and infrastructure of production, distri-
bution, and consumption. By 2050, in fact, the global industrial system is expected
to double its output using 50 % of current resources and generating 20 % of current
CO2. Thus, the industrial system will be central to the world economy through the
coming century, and if we really want a resilient economy, this will only be feasible
through a very different ‘low-carbon, resource-efficient’ approach. In Allwood

F. Tonelli (*) • G.C. Cainarca

Faculty of Engineering, University of Genoa, Via all’Opera Pia 15, 16145 Genoa, Italy
S. Evans
Cambridge University, 17 Charles Babbage Road, Cambridge CB3 0FS, UK

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 27
DOI 10.1007/978-3-642-37018-2_2, © Springer-Verlag Berlin Heidelberg 2013
28 F. Tonelli et al.

Fig. 1 Global CO2

emissions

et al. 2011, a breakdown of global CO2 emissions shows that industry accounts for
about 36 % of total (Fig. 1).
On average, research and studies report the following improvement opportunity
areas:
• 30 %+Global Warming Gas emission from industry;
• 20 %+energy in manufacturing;
• 90 % of waste is ‘commercial & industrial’.
The need to reduce or contain the ecological footprint of the industry will affect
the whole industrial system; the current industrial system has a total “efficiency” of
converting raw material into valuable product of about 10 %. In other words, almost
90 % of extracted resources failing to reach and remain – for more than 6 months –
in the hands of the customer.
But what is wrong in the current system? In a world with infinite supply of both
raw material and sinks for waste, such system inefficiencies could be irrelevant; in a
world with finite capacity, a complex ecosystem, operating close to the boundaries,
this industrial system wasting so much material, energy, water, producing unsus-
tainable CO2 levels is, for sure, not a well-designed system.
Yes, this is a man designed system so why should it be impossible to change
thinking about industry, not only as part of the problem but as part of the solution
towards an industrial system able to deliver the ‘stuff of the world’ using less than a
quarter of current bio-capacity. In other words leading to a reduction of 75–90% in
the use of carbon-based energy and similar scale reductions in resource use and
material flows, while delivering the same value.
The role of industry is crucial to this transition phase; leading companies are
preparing for this on two fronts:
Industrial Sustainability 29

• Rapidly reducing the resource- and energy- intensity in producing existing

goods;
• Investigating the options for a radical re-design of the industrial system.
A redesigned industrial system should:
– Add the same value with 25 % of materials and energy (Factor4);
– Make use of the 90 % of discarded extracted materials;
– Use benign materials that can be reused according to ‘cradle-to-cradle’ concept;
– Refurbish and reuse sophisticated long-lasting components;
– Mimic and nurture the environmental niches.
The scale of the challenge requires a mass approach, unfortunately much of the
current knowledge is held within a few producers/manufacturers, with some not yet
organized academic pockets of excellence.
The term revolution is appropriate since, quoting Einstein “. . .the thinking it
took to get us into this mess is not the same thinking that is going to get us out of
it. . .” Current industrial system overload can be reduced through consciousness
adoption of ETS approach: Efficiency, Technology, and Substitution. The technol-
ogy dimension, in particular, strongly interacts with almost every facet of our lives,
and interacts with almost every facet of the natural world. It is this fundamental
interdependence that creates the strong linkages between the studies of sustainable
engineering, industrial ecology, and more specific methodologies. Furthermore, the
integration of technological development with social and environmental systems is
a key tenet of sustainability (as is made explicit in the master equation). This
interaction/expression has important implications for industrial sustainability
(Paramanathan et al. 2004), which we will investigate and debate in more detail
in the following section/next paragraphs, as being an enabling factor of
sustainability within the companies.

2 Introducing Sustainability in Industrial Systems

2.1 What Does Sustainability Mean As a Term?

It is useful at this point to define what we mean by sustainability. Besides others, the
International Institute of Environment and Development defines sustainable devel-
opment (a synonym of sustainability in this context) as “A development path that
can be maintained indefinitely because it is socially desirable, economically viable,
and ecologically sustainable”. This definition, like many others, provides minimal
guidance to engineers, scientists, political leaders, and citizens. In order to better
contextualise the industrial sustainability a different representation from Ball et al.
(2011) can be reported; in this figure all the aforementioned dimensions and the
contribution of industry are satisfactorily defined, especially with respect to the
environmental dimension. In fact, since 1970, analysis of the environment has
increased and improved, presenting society with the problematic conclusion that
industrial operations are not without consequences (Fig. 2).
30 F. Tonelli et al.

Sustainable Development

Social Environmental

Industrial Sustainable Manufacturing

Ecology
Economic Supply chain and product Zero Carbon Manufacturing:
end-of-life management: - Integrated systems view
Cleaner
- Design for X - Zero material degradation
production
- Rs strategies - Zero net energy demand
- Reverse logistics - Zero waste across the
Technology Pollution - Technology for disassembly supply chain
Prevention

Fig. 2 Sustainable development dimensions and sustainable manufacturing contribution

In order to proceed with the next paragraphs, we need a more precise definition
of industrial sustainability in order to help clarify the research, implementation
areas, and their interactions.
In this text industrial sustainability refers to the end state of a transformation
process where industry is part of, and actively contributing to, a socially, environ-
mentally and economically sustainable planet. Industrial sustainability is also
commonly used to refer to the process of catalysing, planning and delivering the
changes necessary to meet that goal. Hence Industrial Sustainability simultaneously
refers to the goal and the path, and works as both noun and verb.
While it is not clear exactly what that transformation path will look like, it is
growing ever clearer that it needs action at material, product, process, plant and
system of production levels. Beginning with a strong effort to learn how to
manufacture today’s products with the lightest environmental and social footprint,
we can expect the future industrial system to change fundamentally at the system
level if we are to learn to live within our means.
Some findings from literature evidence that in order to sustain human society on
the long-term economic development needs to be decoupled from environmental
impact through technological and societal changes. Moreover, the concepts of
Industrial Ecology, such as systems view and industrial ecosystem, take a macro-
level perspective on closing the loop of resource flow, while Cleaner Production
and Pollution Prevention look at intra-enterprise improvements, but are less
integrated approaches and do not adopt a systems view. Finally, many activities
are generally focused on product design and product end-of-life management while
alternative approaches are focused on manufacturing technology, supply chain
management and product-service systems.
A further step in understanding and managing industrial sustainability requires
its operationalization. Operationalizing industrial sustainability, it is necessary to
determine what it is we wish to sustain, who are sustain it for, and for how long.
Most operational planning durations fall into the 25–50 year range. We will refer to
this through the concept of the rate of change needed in industrial system,
Industrial Sustainability 31

articulated over a 3-stage change (efficiency, technology, system changes) to get

there by 2050.

2.2 The Transitions from Traditional Manufacturing

Starting from the aforementioned improvement areas, industrial manufacturers are

exploring significant savings in energy, water, waste and materials in their plants
and throughout their supply chains. In this first phase eco-efficiency approach is the
first step in industrial sustainability or in other words a simple way of doing “good
business”. A second phase, also called eco-effectiveness, should, although, consider
better approaches, focuses on a more efficient use of energy, water and materials as
closed-loop processes to eliminate waste streams from entering the environment,
considering the product’s entire life cycle and practices that restore renewable
resources and communities, accordingly to the concept of sustainable supply chains
(Gupta et al. 2011).

2.3 The Orientation of Leading Manufacturers

Companies leading in sustainability are integrating their strategy into the corporate
governance and operating frameworks of their companies. Social and environmen-
tal risks are identified as business risk categories and are formally embedded into
enterprise risk management processes. As a result, sustainability decisions become
an integral part of business decision making, commercialization and capital man-
agement processes, the business planning cycle, and customer and supplier
relationships. This would require a fundamental reassessment of how and where
value is added, consumed, and recovered (Vargo and Lusch 2004), operating a
transition from open to closed value cycle. Exploring the sustainability domain
today differs from the recent past drivers such as regulations, politics, management
philosophy and ethics, environmentally conscious customers, customer satisfac-
tion, protection and conservation. Current issues concern the availability of limited
and rapidly diminishing resources as security of the supply of key raw materials and
supply of energy (Meadows et al. 2004). New considerations will drive design and
implementation of manufacturing systems and supply-chains, such as environmen-
tally conscious design and manufacturing (ECDM) described by Sarkis (1995) or
those described in the following table adapted from Dornfeld et al. (2009) (Table 1).

2.4 From Strategies to Frameworks and Tools

We can clearly observe that many companies are tackling sustainability using
different tools and processes, while external advocates propose their own
frameworks and tools. The following list indicates a number of the more popular
frameworks, such as:
32 F. Tonelli et al.

Table 1 Sustainable supply chains design considerations

Transportation Supplier – location
Economic Economic Social
Accessibility Part quality Quality of life
Availability Resource availability Pay rates
Lead Times Lead times and inventory Working conditions
Risk Risk Health care
Environmental Environmental
Emission Electricity mix
Resource use Resource availability
Distance Electricity demand
Emission fate
Regulations

• The Natural Step framework,

• The Industrial Ecology model,
• The Cradle-to-Cradle model,
• Sustainability by Design,
• The Natural Capitalism model,
• Product Service Systems
• Eco-system Services model.
Each of these frameworks has a clear history (for example, the Natural Capital-
ism and Eco-system Services models both use standard economic thinking to
explain sustainability) and can demonstrate some utility. It is not yet clear which
frameworks offer most utility in which industrial situations, and this can be a source
of confusion.
In addition we have a long list of tools designed to help us implement our vision,
ranging from analytical tools, which help us to quantify what our performance is
today and guide progress:
• Life Cycle Assessment (LCA),
• Material Input per Unit of Service (MIPS),
• Environmental Risk Assessment (ERA),
• Material Flow Accounting (MFA),
• Cumulative Energy Requirements Analysis (CERA),
• Environmental Input-Output Analysis (env, IOA),
• Life Cycle Costing (LCC),
• Total Cost Accounting (TCA),
• Cost-Benefit Analysis (CBA),
as well as procedural tools to help structure the journey:
• Environmental Management Systems (EMS),
• Environmental Audit (EA),
• Eco-Design (ED),
Industrial Sustainability 33

• Closed Loop Supply Chain Management (CLSCM),

• Environmental Performance Review (EPR),
• Total Quality Environmental Management (TQEM).

2.5 Specific Actions Towards Industrial Sustainability

From a practical point of view, in order to begin a transition towards industrial

sustainability, companies have to decouple economic development from environ-
mental impact mainly through technology (having less influence on societal
changes); they should take appropriate actions at macro-level perspective –
i.e. closing the loop of resource flow – while continuing with intra-enterprise
improvements such as cleaner production (CP) and pollution prevention (P2).
Since SM activities are generally focused on product design and product end-of-
life management, alternative approaches focused on manufacturing technology,
supply chain management and product-service systems, have to be explored.
It is clear that industrial sustainability is a rapidly developing subject, with
practitioners learning about what works and what doesn’t very quickly, and with
a growing number of researchers trying to develop both specific solutions and
useful frameworks. Currently implementation guidance is going through a phase
of divergence – there are a growing number of consultancies, government
organisations and in-company implementers who are developing, using and
advocating their own implementation frameworks, which is to be expected when
a subject is relatively new and complex. Observations of practicing companies
suggest that there are common themes across many of these frameworks such as:
the use of management by targets, the use of existing management systems wher-
ever possible (such as Quality Management), the increasing involvement of
non-traditional stakeholders, an initial focus on energy use and waste which often
broadens out to a deeper understanding of material and energy efficiency, an initial
focus on internal operations that grows to involve others (such as suppliers and
customers), material substitution (but a limited willingness to innovate the product
initially).
These companies are leading in terms of environmental performance, but even
the leaders are only now beginning to target the system-level challenges of indus-
trial sustainability – how to make sustainability an integral part of the management
system, how to co-operate with others to innovate the system, how to make strong
social performance an integrated part of the company system (not philanthropy),
how to innovate the way they do business (the ‘business model’) so that environ-
mental and social performance is internalised.
Given the emergent nature of the subject it may be prudent not to advocate
individual frameworks or tools yet. It may be more useful to agree ways in which
good practices (the things that work well for some frameworks under some
conditions) are shared, and therefore enable the development of second stage
frameworks as we converge on sensible practices. Indeed it is far more urgent to
34 F. Tonelli et al.

have industry energetically use as many frameworks and tools as exist, and so
increase the speed of learning about industrial sustainability implementation
practices.

3 Derive Implications for Sustainable Manufacturing

and Supply Chain Design

3.1 A System Design Approach

According to the traditional view, product design and process technology typically
determine the types of pollutants emitted, solid and hazardous wastes generated,
resources harvested and energy consumed. Unfortunately, in a business environ-
ment of resource and energy supply uncertainty, the traditional view and the related
business model, requiring the continuous exploitation of new markets for growth,
the enhancement of products to maintain demand and global sourcing to sustain
margins, whilst absorbing the costs of compliance with end of life cycle legislation,
is clearly unsustainable.
Such a traditional production system design is based on the development of
separate management sub-systems and separate commercial sectors: production/
industry, consumption/retail, and waste. This three separate sub-systems design
process, driven by self-interest, leads to an unavoidable sub-optimization. The
greatest example of which is the value that we carefully add to our materials as
we transform them into saleable products, only for that value to be passed into a
waste system that cannot identify or use the value fully, and which has very little
competence or incentive to create closed-loop material cycles.
Such unsatisfactory design approach needs to be restructured according to new
principles:
• Show scope, (lack of) connection and alignment of the three separate systems,
• Clearly identify the material life cycle stages,
• Connect these stages with material flows,
• Seek to increase and maintain value AND thermodynamic state,
• Reduce waste during the industrial processes.
Direct process implications of this revised approach are:
• Yield improvements (less waste),
• Energy and material increased efficiency,
• More recycling rate;
• Less water, land, soil pollution,
• Reduced virgin material extraction.
Practically adopting the aforementioned principles requires a different systemic
view starting at unit process level up to entire supply-chain and product/process life
cycle.
Industrial Sustainability 35

Fig. 3 Manufacturing unit process input/output flows (Adapted from Dornfeld 2009)

Concerning the unit process level, the following model describes the inputs and
outputs adding the fundamental environmental viewpoint in terms of negative
impacts on the eco-sphere (Fig. 3):
Each process unit takes in materials and energy in various forms and creates the
planned output (valuable product or semi-finished product) together with output
waste (some of which may be recycled, and much of it will be emitted to air, land or
water). At this level, clearly, our aim is to tackle the problem of creating more
valuable output using less of the valuable inputs and creating less of the waste
outputs, and we can adopt various techniques to do this (re-manufacturing, more
efficient processes, use renewable energy, etc. . .).
At the process unit level of a single manufacturing process, this is a useful
description and helps us find solutions, but those solutions are narrow – it is not
directly obvious that making a product last longer with the customer will reduce the
overall flow through a single manufacturing process. For these reasons it is reason-
able to extend the model at a number of levels within the entire industrial system,
beginning at single production processes and ending with the boundary
representing the entire industrial system and its interaction with the ecological
system (as emphasised in industrial ecology).
36 F. Tonelli et al.

primary resources
and semi-products
requirements
Design/development

Manufacture

products waste/
emissions
resources

Use/fulfillment of
requirements
material/energy

information waste/
emissions

Fig. 4 Traditional manufacturing system

Building this multilevel and multistage analysis requires a wider perspective; the
basic unit process (even multiple ones), can be incorporated in a box we will name
Manufacture. It is useful to consider that the box called manufacture is representing
many things, ranging from a single process, to a factory that makes end products, to
a chain of supply to a global industrial system. This box is traditionally linked to
Design/development and Use/fulfilment of requirements box, with input of
resources and output of wastes (see Fig. 4).
A first improvement implemented in modern countries has been the waste
treatment approach at the product end-of-life, by adding Waste treatment and
Lanfill final disposal boxes as shown in Fig. 5.
A second important step has been implemented through the recycling process of
end-of-life products, introducing the concept of circular loop, as shown in Fig. 6. At
this stage, the components of the product life cycle are defined through four typical
stages: acquisition and processing of the necessary resources, manufacture, use, and
reuse/recycling/disposal. Collection/sorting of used material and Reuse/recycling
boxes, are devoted to reduce the need to produce other products to satisfy customer
requirements (in this sense second-hand usage can be considered a particular case
of collection/sorting and eventual refurbishment).
Nowadays, a third step has been introduced, accordingly to material and energy
productivity improvement of manufacturing system, adding the generation of
reusable discards in manufacturing stimulating a “prompt scrap” sub-cycle, as
Fig. 7 shows. In this latter case internal products or semi-finished products can be
re-used or re-manufactured reducing scrap and waste rate. This step is still
Industrial Sustainability 37

primary resources
and semi-products
requirements
Design/development

Manufacture

products waste/
emissions
resources

Use/fulfillment of
requirements

waste/ Waste
emissions treatment
waste
material/energy resources
Landfill/final
disposal
information
emissions

Fig. 5 Product end-of-life waste treatment process

primary resources
and semi-products
requirements
Design/development

waste/
emissions

Reuse/recycling Manufacture

Recy
cled
prod
resources ucts products waste/
emissions
post-consumer
product/materials resources

Use/fulfillment of
requirements
Collection/sorting
ts
roduc Waste
rded p waste/
disca treatment
emissions
waste
material/energy resources
Landfill/final
disposal
information
emissions

Fig. 6 Product end-of-life reuse/recycling process

undergoing because of technological implications: i.e. introducing equipment for

collecting/re-manufacturing/re-cycling, implementing reverse flows inside existing
factories and layouts, modifying planning and scheduling criteria for equipment
allocation, . . .
38 F. Tonelli et al.

primary resources
and semi-products
requirements
Design/development waste/
emissions resources

waste/
emissions Recycling

Reuse/recycling Manufacture

Recy
cled
prod waste/ Collection
resources ucts products
emissions
post-consumer
product/materials resources

Use/fulfillment of
requirements
Collection/sorting
ts
roduc Waste
rded p waste/
disca treatment
emissions
waste
material/energy resources
Landfill/final
disposal
information
emissions

Fig. 7 Manufacturing collecting and recycling process

The last proposed step adds two important aspects:

1. Recovering resources (named “secondary”) from Reuse/recycling box at the
product end-of-life to be input to Manufacture box in order to reduce drastically
the virgin material extraction,
2. Revising Design/development box in order to overcome actual limitations in
disassembly, recovering, reusing, and recycling current generation products.
This can be considered the most difficult, yet valuable, step since it involves
product and manufacturing processes redesigning (Fig. 8).
In the complete diagram, resources, either from primary (“virgin”) or secondary
(recycled) sources, are required to a greater or lesser degree at a number of points in
the cycle, and emissions occur at a number of points as well, depicting the
performance of a product through its life as well as the performance of an extended
manufacturing system. These are not the same thing and their interactions have to
be handled with care – for example, it is challenging for manufacturers to re-use old
product at the end of their useful customer life, even with the technical competence
to refurbish the product the customers may not want old designs (one of Xerox’s
great achievements has been to maintain the design discipline of modularity over an
extended period of time, thus enabling the re-use of entire modules without
affecting the ability of future customers to have the product they want). The inputs
and outputs and useful tactics can be applied at different levels but must be
understood and analysed at the appropriate level. This is important because as the
scope of the system increases then the ability of a single person or organisation to
effect the planned change is diminished. Only through co-operation with others will
system level changes be able to happen.
Industrial Sustainability 39

primary resources
and semi-products
requirements
Design/development waste/
emissions resources

waste/
emissions Recycling
secondary
resources

Reuse/recycling Manufacture

Rec
ycle
d pr
odu waste/ Collection
resources cts products
emissions
post-consumer
resources
product/materials
Use/fulfillment of
requirements
Collection/sorting
ucts
prod waste/ Waste
rded
disca emissions treatment
waste
material/energy resources
Landfill/final
disposal
information
emissions

Fig. 8 Complete product/process lifecycle with flows and impacts (Adapted from Graedel and
Allenby 2009)

In parallel to changes needed in how we view the technical system of production,

we have to influence the business system as well. Emerging opportunities for
industry include:
• Re-internalizing externalities,
• Changing current attitudes (more is better, don’t expect the system to change,
choose safe and well-known materials),
• Extending knowledge of other complementary/synergic systems and
technologies in order to join up multiple systems of production and waste,
• Acquiring a whole system design approach (when stuck, do not slice a problem
into smaller solvable sub-problems),
• Exploring new technology opportunities, new materials, or new products that
apply off-the-shelf materials that are currently under-used or use existing
materials well.

3.2 Sustainability Performance Measurement

and Management

In recent years, performance measurement and management (PMM) has received

much attention from researchers and practitioners (Taticchi et al. 2008; Arena et al.
2009; Cagnazzo et al. 2009, 2010). Nevertheless, the consistency of the current
PMM body of knowledge in relation to sustainability, in terms of models and
40 F. Tonelli et al.

frameworks reveal the inconsistency of available PMM systems to meet the

sustainability challenge. Suggestions for addressing future research are given
Taticchi et al. 2010, where six milestones were identified as essential:
1. Understanding of Cause-Effect Relationships between different performance
indicators,
2. Control of Time Dimension (LCA),
3. Measurement of Leadership Commitment,
4. Measurement of Contributes and Effects of/on Stakeholders,
5. Evaluation of Financial Outcomes,
6. Industry Specificity.
With these regards, only 7.7 % of the models/frameworks reviewed suggest an
LCA approach to performance indicators or provide guidelines depending on
industry typology. In order to have a complete overview of sustainability PMM,
please to refer to Chap. 2 of Sect. 3 of this book.

3.3 Implications on Material and Energy

Newly designed production system has to take into account two different resource
efficiency trajectories: materials and energy. An updated and useful representation of
the main implications is represented in the following picture where material effi-
ciency means providing material services with less material production and
processing, while energy efficiency, especially for energy intensive industries, aims
to reduce the energy required to perform a transformation/production process (Fig. 9).
A useful trend has seen the rise of energy and waste hierarchies as guiding
principles. These simple visualisations help new and mature organisations to
structure their approaches, on the assumption that actions higher up the hierarchy
are normally superior (Fig. 10).
Unfortunately the higher actions (reduce, re-use) are less common, even if more
effective from business and environmental viewpoints. In part this is caused by the
greater requirements for co-ordination and working with other organisations (for
example, re-use may require a producer to find a way to get their end-of-life
products back to their factory) (Table 2).

3.4 Positioning Research Contributions

The evolution towards a ‘sustainable’ production systems, also identified by some

Authors with the acronym of Sustainable Supply Chains (SSCs), require a funda-
mental shift from fragmented and functional approach to an holistic one, with a
Industrial Sustainability 41

Fig. 9 Material efficiency contrasted with energy efficiency (Adapted from Allwood et al. 2011)

Fig. 10 Energy and waste hierarchies

Table 2 The energy management hierarchy (Adapted from Special Report – GHG Management &
Reporting IEMA 2011)
Avoid Eliminate GHG emissions when organizations change business model, rationalise or
move premises
Adopt new business models and products or services
Reduce Reduce total energy usage and improve energy efficiency
Reduce energy usage at peak times
Substitute Adopt renewable and low carbon technologies
Target suppliers, goods and services with lower embodied emissions
Compensate Investigate carbon offsets and compensate for unavoidable emissions
42 F. Tonelli et al.

fundamental reassessment of the value creation. New sustainability concept and

constructs, as well as high level structures, have been analysed and proposed
such as:
• The challenge of Closed-Loop Supply Chains (Guide et al. 2003),
• Sustainable supply chains: An Introduction (Linton et al. 2007),
• Sustainability in the Supply Chain domain (Carter and Rogers 2008),
• Energy efficiency in Supply Chain and climate change (Halldorsson and Kovacs
2010).
The fundamental reconsideration required to move the first steps towards the
sustainable supply chain domain introduces several sources of complexity:
• Dependencies between supply and consumption exist (Svensson 2007),
• Management of inter-organization relationships is well known but not oriented
to sustainability (Skjott-Larsen et al. 2007),
• Replacing a traditional value proposition with a sustainable value proposition is
hard to implement (Srivastava 2007),
• Bounded unidirectional rather than bidirectional view of material flows,
• Fragmentation limiting a systemic understanding,
• Limited number of sustainability initiatives that have proven to be economically
viable to date.
The investigation of literature and existing industrial experiences can be useful
in drawing the most common limitations of the current way of thinking; first no
panacea working in all industries, for all products, and for all customers exists,
since examples like Xerox and Toyota (Evans et al. 2009) can provide useful insight
but specific models need to be developed across different industries. In order to face
the industrial sustainability problem an unprecedented level of cooperation is
required between the external agents in the supply network and an organization’s
internal functions because sustainable solutions must extend the value chain beyond
conventional boundaries. A sufficient (quickly growing) body of literature exists
but with limited focus and narrow perspective, and in practice few tools are
available to help industry in calculating the whole system performance approaching
a large problem solving process (Evans et al. 2009).

3.5 The Role of Organizational Change and Its Implications

From organizational point of view, moving towards sustainability implies, as

reported in the previous paragraphs, a paradigm shift to a holistic approach. The
frequent literature references, concerning the cultural change, witness that the
organization tool outlines and allows the strict interrelations between economical,
social, environmental, and technological domains. The exploration of organization
fundamentals with respect to sustainability moves through the organization levels,
ranging from producing, consumption, and recovering. The initiatives required to
communicate and share the “finiteness” of the planet – in order to translate the
Industrial Sustainability 43

holistic perspective for all the subjects of the socio-economic context – must
involve every level from the inter-organization to the intra-organization ones,
until the single individual. If for this latter, the reflections about environment
perspective are similar to the ones of commons, concerning the organizational
levels the situation is quite different.
Inter-organization level: in general terms, inside the organization ecosystem, we
can find interrelating actors related to guidance subjects/enterprises or system
evolutionary orientation/direction diffused within the enterprises. The sustainability,
with respect to environmental, social, and economical domains, can arise only
through the deliberated action of Institutions or Leading enterprises. Concerning
Institutions, the power of orientation/enforcement in guiding the change of the entire
ecosystem doesn’t necessitate of additional explanation. A different situation arises
when we look at autonomous action of leading enterprises, which perceiving
instances of social values – implicit or explicit – understand that sustainability
could represent a precondition to avoid decline. The holistic approach featuring
these enterprises build up on the capacity of managing the network – inducing
behaviours and practices environmentally virtuous – either for supply side (raw
material sources) and for demand side (consumer, recovering, reuse, recycle, . . .).
In organizational terms, the literature presents reference models useful also in the
sustainability context; the paradigm shift from “push” to “pull” logic and the
implications inducted in the reorganization of industrial activities offer a valid
example of governance models more coherent and efficient with respect to new
expectations of the social context. To completely appreciate the potentialities of the
network management it is sufficient reminding some of the “cultural” changes
occurred in the last quarter of the previous century; from continuous improvement
to total quality management and all related innovations in terms of processes
governance. It is easy to see similarities between the need to coordinate the
innovation effort – spread either at intra- and inter-organizational levels – with
the requirement to harmonise the ecological sense of individuals. Diversities of
coordination approaches – for instance Japanese and Western enterprises
relationships towards suppliers and partners – offer a confirmation that in the
sustainability context not all the strategic choices have to be voluntary by definition.
Hence leading enterprises’ role in reshaping the ecosystem is significant; they have
to decide between “involve” or “force” the participation of the others actors,
starting from the final user, who has to share and award the holistic and ecological
choice of sustainability, up to those involved in complementary activities. This
focus on the leading companies, although, doesn’t exclude an active role of all the
others subjects sharing the holistic approach; they can and must transform the
ecological innovation in a competitive tool. To this concern, the compliant with
environment standards – more than allowing emancipation from blocked
relationships – allows to begin virtuous paths to identify improvements areas, and
focalize on the environmental efficiency, with potential social-economic benefits,
and thus, resources to utilise for new improvements seeking (see the Toyota
example). The coordination of activities is based on negotiation – definition of
standards of targets to achieve – on commitment, and execution, including the tools
44 F. Tonelli et al.

to verify the success of the various steps (Skjott-Larsen 2007). The technology’s
role arises here in all its importance being determinant either on “hard” innovation
and organizational assets, as a tool allowing the holistic approach to become reality.
Intra-organization level: one of the best steps descriptions to walk the proposed
revolutionary journey is, probably, offered by Andrew J. Hoffman in “From Heresy
to Dogma”. Even if focussed only on oil and chemicals enterprises, Hoffman
outlines the organizational transformation required to accomplish a green vision;
the top management commitment – as put in evidence also in the Quality case –
represents a kind of discriminant pre-condition to legitimate every action in an
environmental orientation. It is exemplary following as when the legitimisation of
stakeholders progress, the enterprise strategy adapts to scenarios evolution and
how, consequently, the enterprises evidences, inside, the definition of new priorities
with incremental transformation of strategy and structure (see Table 3). In 90s, the
big US Companies begin to pay attention to environmentalism creating new
executive positions. In 1991, 49 out of Fortune’s top 100 present a vice-president
for environment topics and the percentage is still greater if we look at top 50, where
the environmentally oriented companies are 39.

3.6 Extending the Perspective: Towards Sustainable Supply-

Chains

Accordingly to the previous analysis of industrial sustainability problem, possible

answers can be presented, acting on two main directions: the product demateriali-
zation towards services and the improvement of efficiency in manufacturing
products. The former direction has been explored in the last decades and first
interesting approaches have been formalized:
• ‘Serviticization’ concept (Cook et al. 2006),
• Product Service Systems (Baines et al. 2007; Evans et al. 2007; Taticchi et al.
2009; Tonelli et al. 2009).
Concerning the second research direction, as stated by Svensson (2007), existing
models do not provide an integrated perspective of the flow systems and therefore
the means of developing a systemic understanding of the sustainable value propo-
sition; a situation that is perpetuated by a tendency to consider the systems for the
supply of products and their recovery as separate entities. Improvements of supply
network can be articulated in many different research streams ranging from tech-
nology improvements (Jovane 2008) at machine level to network collaboration.
Looking at the collaboration level, current and future research concerned with
developing environmentally sustainable supply chain business models must focus
on the identification and the management of information and interfaces between
customer, marketing, design, operations, logistics, and external agents of the entire
supply network. Important development phases should foster improvement
 Industrial Sustainability

Table 3 From Andrew J. Hoffman (2001)

Environmentalism as social
Industrial environmentalism Regulatory environmentalism responsibility Strategic environmentalism
Phases 1960–1970 1970–1982 1982–1988 1988–1993
Organizational Problem solving: considered an Technical compliance: although Managerial compliance: moving Proactive management:
structure ancillary aspect of conducting elevated to a separate beyond mere technical organizational boundaries blur,
and culture business, it is handled primary corporate department, it responses, managerial structures allowing direct influence by
as an operating-line function remains an ancillary role with are developed to achieve external interests. The
low organizational power, compliance based on internal environmental department
focused strictly on legal constraints. Environmental reaches new levels of
requirements responsibilities begin to diffuse organizational power.
throughout the organization Environmental considerations
begin to be pushed across
functional lines and back down
into the operations, integrating
them into both process and
product decision
45
46 F. Tonelli et al.

products durability and performance, incorporation of external supply networks,

inclusion of the customer and the usage phase, as well as activities to recover
residual value through economies of scale in:
• Reuse,
• Remanufacture,
• Recycling.
This would require a completely new supply chain paradigm with suppliers able
to provide the services to support Original Equipment Manufacturer (OEM) and
third party recovery specialists for reverse flows, including end-of-life. In this new
paradigm several aspects need to be considered:
• Overcoming Porter’s value chain model,
• Extending green supply chain, reverse logistics, and closed loop supply chains,
• Incorporating design for sustainability,
• Considering all the life cycle information flows including dismissal and recovery
phases (Brodin and Anderson 2008).
The implications of this paradigm shift are not negligible influencing strongly
marketing, design, and operations. From the marketing point of view more attrac-
tive value propositions have to be created by leveraging on extending product life
cycles, capturing and recovering end-of-life product, and ensuring safe disposal/
reuse of components and materials. The lifetime extension of a product or service,
for instance, requires that organizations focus on their involvement in the whole life
of the product or service and be aware that it is still their responsibility even if it has
been temporally passed to a user. In a broader view of marketing strategies, selling
and compliance ones outline the importance of adopting a proactive approach,
whilst spinning, harvesting and ‘enviropreneur’ ones highlight the need to develop
integrated, long-term, customer focused strategies. These may entail reconsidera-
tion of the ‘entire product life cycle’ or value cycle through a re-evaluation of both
product and process designs.
However, once a product has reached the end of its normal life cycle the
efficiency with which the recovery process can be conducted and the extent to
which products can be reused, components can be remanufactured and materials
recovered is almost entirely determined by a product’s design. For these reasons
new sustainable design approaches should articulate on two stages:
1. Consumption of resources at all stages of life cycle
• Less material in product/service, package, production, distribution, recovery,
• Minimizing hazardous materials,
• Less energy consumption for the use-phase.
2. Extending product life cycle
• Improving customer perception of fashion, pride of ownership, durability.
3. Facilitating dismantling phase.
Industrial Sustainability 47

Obviously, an acceptable solution for disassembly must involve consideration of

the cost of remanufacturing activities against the revenue that can be derived from
the recovered material and products. A reasonable approach should take into
account the following aspects:
• More extensive use of modular design,
• Use of standard interfaces for disassembly,
• Less standard parts to disassemble (reducing volume and variety),
• Minimum transportation costs for disassembling when not performed by OEM,
• Use of ‘smart’ materials (fasteners that revert to their original state on the
application of heat),
• Use material ‘easy’ to be recycled with minimum of energy input or degradation,
• Reduced on durable packing or environmental friendly,
• Labelling of parts and subassemblies to be coded and easily identified,
• Reduced disassembly time and operations.
Marketing and design, alone, do not provide a truly sustainable production
model; only when operational activities are considered in conjunction with new
product/service offerings and enhanced product design features for sustainability,
the full benefits can be realized. Jovane et al (2008) propose a reference model for
proactive action to develop and implement CSM. They build on the work of
Yoshikawa who promotes the idea of minimal manufacture and maximum service
within a closed loop supply chain. However, when products eventually reach the
end of their economic life not all of them will contain valuable components and/or
materials that make the recovery of these products economically viable, for
instance because of incorporating these recovery activities in an original equipment
manufacturer (OEM) significantly increases the complexity of the organizations
operations. For example, production planning/control will be more difficult because
of, amongst others, the variability that exists in the quantity and timing of returns,
the variety of products and generations of products being processed and the
unknown demand the recovery operation places on the firm’s resources; inventory
management will also become more difficult because of the variability in recovery
rates; facility costs are likely to increase because of the need for additional facilities
to disassemble a wider range of products than would normally be processed through
forward assembly operations; the skills and capabilities of the firm’s labour force
will also need to be extended to accommodate the increased product mix in the
disassembly operations (Linton 2007).
Thus, new operational issues seems to be related to extend process efficiency
beyond end-of-pipe approach, increase volume of disassembly processes
(economies of scale), even with third parties, concentrating parts coming from
different locations and mitigating complexity growth in standard operations, estab-
lish new relationships with key suppliers and third party recovery specialists. To
this concern, logistics implications have to be coherently addressed; deciding on
how and where a product is manufactured and retrieved will impact on service
levels (where customers are involved), logistical costs (handling and transporta-
tion), facility costs (warehousing and storage pending reprocessing) and, the
48 F. Tonelli et al.

environmental impact of transportation. Vertically integrated organizations have

the benefit of improved communication flows between disassembly and design,
even if the complexities of the bidirectional flows will increase the difficulties of
planning transportation. Unlike forward logistics, which are concerned with deliv-
ering large volumes as efficiently as possible to a few outlets, recovery involves the
collection of products of unknown quality in small variable volumes from many
pickup points frequently involving third parties with whom product information
must be shared. Indeed, economies of scale can be more easily achieved by third
parties who are able to reduce transportation costs by aggregating loads between
pickup points and collection centres. A complete discussion of issues in environ-
mentally conscious manufacturing and product recovery can be found in Ilgin and
Gupta 2010, while the complexity of controlling distribution supply-chain can be
found in Alessandri et al. 2011.
Finally, sustainable business models also raise questions of resource location (to
support primary and secondary material flows), vertical integration and cooperation
with third parties, the sharing of proprietary information, whether to adopt techno-
logical developments in manufacture (e.g. process integration), and the role of
product characteristics and industry standards.

4 Discuss and Formulate Open Questions and Plans for

Tomorrow Activities

The alternative business model summarized and presented in this chapter

introduces many novel elements starting from a different consumer acceptance in
terms of products and services, and secondary product usage.
Designing products for extended life-cycles, and re-using sub-assemblies and
components thanks to a distributed community for re-manufacturing and recovering
appears to be of crucial importance for material efficiency targets. On the organi-
zational side, the vertical integration of secondary value stages and/or the creation
of strategic partnerships within global and local supply networks – with reverse
flows and value recovery activities – are required conditions to guarantee the
feasibility of a sustainable model.
The practical adoption of sustainable industrial models leads to important
considerations and implication for politicians, educators/researchers and for
manufacturers in the short & long term.
A first enabling step would be for industry, government and academia to
co-operate in the development of a common definition of industrial sustainability
and sustainable manufacturing as well as a common way to assess and reward
sustainable industrial practices. Such a vision would not be prescriptive in setting
out precisely how each component of the industrial system should work in the
future, instead it must concentrate on the ‘system conditions’ that encourage
improvement and co-operation and seek to increase experimentation so that we
Industrial Sustainability 49

can improve the speed of learning about what works and what doesn’t. Those
nations, supply chains, factories and businesses that learn most quickly how to
operate in a world of resource and energy scarcity will hold a competitive advan-
tage that will become ever more powerful.
Our vision is a sustainable industrial system that delivers high value to its
growing base of customers around the globe, while using, at most, a quarter of
the current resources. Such a system would be very different to today’s global
industry – less homogenous with different business models and different
relationships, creating different products and services. It is not at all clear what
such a system would look like, indeed there may be very different industrial
systems working alongside one another. The urgency for change is now feeding
through from scientists into mainstream government, business and academic think-
ing. The rate of change is likely to increase and we can observe many businesses
quietly tackling parts of the challenge. The path to a sustainable industrial system is
difficult to plot – we are simply too naı̈ve in our understanding of the relationship
between industry and ecosystem and we lack sufficient experience to plan the whole
journey.
This offers a rich ground for academia over the coming decades; indeed we
might expect that the deliberate design of a sustainable industrial system becomes a
specific skill, requiring education and research to match. The immediate need is for
rapid changes to existing systems and it is possible to observe a pattern from some
of the pioneering manufacturers. These suggest that academia must improve its
understanding of how industry impacts the ecosystem, must seek out new
collaborators in a deliberate programme of problem-solving research and educa-
tion, must explore a variety of new mental models to describe the industrial system
and must collectively gather and learn from practice.
Based on this each of us can make informed choices about whether and how to
change our own teaching and research to support the delivery of well-informed
students and new knowledge.

4.1 Recommendations for Educators

• Every manufacturing and engineering design course must have a substantial

component of teaching that explains climate change and resource productivity,
and explains how the industrial system interacts with the social and environmen-
tal systems of the planet.
• All qualifications to be ‘time lapsed’, so that practicing engineers and
manufacturers are encouraged to renew their knowledge. Part of that renewal
would include specific components on sustainable industrial systems and
biological systems.
• Universities to cooperate urgently in developing teaching material that is locally
appropriate.
50 F. Tonelli et al.

• Creation of a virtual and real International Summer School for teachers of the
Sustainable Industrial System, in order to significantly accelerate the develop-
ment of faculty capability.
• All topics taught to manufacturing and engineering students should be looked at
in terms of their contribution to sustainability, and all student projects should
include at least some discussion on sustainability impact.
• Encourage interaction with environmental scientists and policy students on the
positive role that the industrial system can play in making modern society more
sustainable. These students would benefit greatly from learning the improve-
ment, problem-solving and innovation skills that manufacturing and engineering
design student’s gain.
• Measure and improve the total energy and material used to deliver our education
(per student) and engage faculty staff and students in improving that.
• Team up with any local manufacturers who have experience in improving
resource productivity – providing them with student resource and providing
academia with teaching resource.

4.2 Recommendations for Researchers

• Encourage large, problem-solving research (e.g. the human genome project)

where we avoid duplication of research effort if possible, and agree to tackle
specific topics.
• Develop the new field of ‘design of sustainable industrial systems’.
• Investigate which models of new industrial systems can deliver the radical
changes required.
• Work with local industry on problem-solving projects, preferably with other
disciplines and preferably with ambitious targets for improvement, that cover the
whole industrial process.
• Agree on formats for making research available to other researchers and
practitioners in a manner that encourages its use in practice. Current journals
do not achieve this.
• Agreement on standards for measuring and assessing progress toward
sustainability, to encourage transparency in both academia and industry in
reporting results.
• Build tools to help industry calculate what the best performance of a whole
system might be.
• Build a database of good examples and share globally.
Industrial Sustainability 51

4.3 Recommendations for Industrialists

• Find out what is possible today without radical change and implement this
quickly – don’t be content with less than 10 % improvement.
• Identify your largest two to four environmental impacts and engage with existing
communities and universities who might know how to tackle these.
• Join with universities and/or unions and/or governments in benchmarking your
performance against similar companies and against best possible targets.
• Pester your government to change policies so they reward the positive activity of
doing more with less.
• Work with customers, suppliers, competitors, governments and others to pro-
mote system-level change.
• Investigate radical change of the industrial system and your potential role in it.

4.4 Recommendations for Policy Makers

• Funding of technological innovation and sustainable innovation should not be

separate.
• Understand what the current ‘best-in-class’ performance is for all products and
systems, so that we know how near (or far) the majority of products and systems
are from this.
• Demand best-in-class products and manufacturing practices from suppliers
(such as Japan’s ‘Top Runner’ scheme). This works for both government
procurement and, through legislation, for consumer products and systems.
• Support and reward significant reductions in energy and resource use.
• Facilitate industry cooperation delivering system-level change.
• Ensure that the full energy and resource ‘shadow’ for all products and services
are available to producers and consumers.
• Support massive re-education of the existing workforce, as they are best placed
to deliver immediate change.
• Recognise that a low-carbon economy is fundamentally different and support
efforts to explore these differences.
Finally, far to be intended as a specific research agenda on the topic of sustainable
industrial systems, but is an attempt at describing how research might change and
what could be valuable open questions to investigate.
• What are implications of operational business continuity and resilience on the
long-term to justify significant investments plans?
• Can meta-models integrate specific optimization and life cycle analysis models
supporting better design of the business proposition?
• How can we increase co-operative forward planning and action, so that system
level changes become feasible?
52 F. Tonelli et al.

• How can business in high labour-cost countries promote material efficiency if it

requires more local labour, while material and energy are small contributors to
the costs of mass production?
• How can developing economies implement industrial sustainability into their
development path?
• How can we encourage information and practice sharing so that industry rapidly
improves its current efficiencies?
• Where to localize manufacture or re-manufacture (globalization vs
eco-industrial-niches)?
• Given that most goods can be maintained indefinitely, what drivers would
promote more intense use, maintenance, repair and re-sale rather than disposal
and under what conditions would this not be advantageous?
• A key driver of profit in production has been increased differentiation, yet design
for re-manufacturing and re-use would favour standardization. How can these
needs and opposing forces be resolved?
• How to optimize reverse supply chains considering economic and environmental
factors/costs?
• What are the opportunities for significant dematerialization of material services
and how can they be promoted?
• What are operational, process and logistical implications of adopting new or
substitute materials and technologies?
• Where would the greatest future benefits from remanufacturing occur, and how
would they be promoted?
• What might drive demand for component re-use, and how would the required
supply chain operate profitably?
• What are operational and technological issues involved in effectively tracking
products throughout the full value cycle?
• How to develop scheduling models for re-manufacture on a much larger scale
than currently envisaged and possibly using external agents collaborating with
several OEMs?

5 Conclusions

Industrial systems have evolved through competition and technological change,

always seeking to do more with less than the competition and so survive into the
next generation. This Darwinian metaphor is compelling and often useful, yet it
fails to capture our uniquely human ability to predict and plan. Only humans, and by
implication also our industrial systems, can see a future peril that has never been
seen before and prepare for it.
We argue that those industrial organisations that predict and plan for a sustain-
able future are likely to survive into the next generation. Learning how to use
significantly less material and energy to create the same or better customer value,
while creating little or no waste is not only a sensible long-term strategy but a
Industrial Sustainability 53

compelling argument in today’s volatile world. Such businesses will be resilient to

some of the forces bearing upon them. The moment for significant action is now.

Case Study List and Sources

In this section some short case studies are used to illustrate both the current state of
practice and show that no single framework or tool is yet dominant, indeed each
organisation has followed a quite different path which is very carefully
contextualised – for example, many companies have begun their journey deliber-
ately limiting the level of innovation expected from their customers (though not
all).
VITSOE. Manufactures and distributes high quality furniture around the world.
Its key product is a universal shelving system (the 606) that won multiple awards
for design excellence and is part of the collection at the Museum of Modern Art in
New York City. Vitsoe was founded in Frankfurt, Germany in 1959. In 1995 Vitsoe
moved all aspects of the company and production to the UK and since then, sales at
Vitsoe have risen year on year by 20 %. Vitsoe focuses on generating steady growth
by constant, incremental improvements to the quality of both product and customer
service, which the company is able to control fully by selling direct.

What Trigger Is the Company Responding To?

The cost of most consumer products has dropped significantly in today’s markets,
ensuring that little value is attached to the products, allowing them to become
disposable (repair being unavailable or uneconomic). Trends in fashions also
increase the disposability of consumer items, leading to significant amounts of
wasted resources.

What Was the Response?

Vitsoe’s differentiated position has been to ignore high fashion, creating timeless,
robust products that favour simplicity and flexibility. Vitsoe creates furniture that
lasts longer and concentrates on reuse not disposal. All new components are
designed and manufactured to be compatible with the original system. The designs
use non-toxic material and create very little waste during production. Vitsoe has
invested in reusable packaging for its suppliers and for shipping products to its
customers. By pursuing this position, Vitsoe has minimised the impact of its
activities on the environment.
54 F. Tonelli et al.

Bottom Line Benefits

By encouraging the user to buy only what is needed, the customer relationship is
established on the principle of long-term value. More than half of Vitsoe’s
customers are existing customers who are adding to, rearranging or reinstalling
their furniture, which may have been bought as long ago as 1960. Customers buy
Vitsoe’s furniture because they can reuse it, rearrange it and take it with them; they
understand that they are making a genuine lifelong investment.

Wider Lessons

Vitsoe has not received any incentives, tax breaks, grants or loans to support its
desire to take a longer-term view of the design and support for its products; and yet
they have survived almost 50 years in the market.
XEROX. Is a global document management company which designs,
manufactures, sells and supports printers, multifunction systems, photo copiers,
digital production printing presses, and offers related consulting services and
supplies. Founded in the USA in 1906, Xerox is famous for its invention of the
plain paper copy and the laser printer.

What Trigger Is the Company Responding To?

Xerox has been recovering used equipment since the 1960s. In the late 1980s and
early 1990s there was a drive to develop a more formal system to maximize the
profitability of using recovered equipment in remanufacturing operations. In paral-
lel, Xerox began its ‘Waste-free Products and Factories’ initiative in 1991.

What Was the Response?

The company shifted its operation from a product based system (selling a photo-
copier plus maintenance) to one in which it provides a service (selling the ability to
produce copies). The service model is intended to improve customer experience and
to incentivise and enable Xerox to address the minimisation of waste throughout the
design, make, use and end-of-life stages.
Xerox has produced toner which requires less mass per page, and their High
Yield Business Paper can utilise 90 % of a tree, whilst typical paper uses only 45 %.
Modular product design, wide product compatibility across models, integrated
return logistics, ease of assembly and disassembly and the development of hi-tech
Industrial Sustainability 55

quality assurance methods has allowed reuse of over 90 % of components and

remanufacturing of products. The ‘Waste-free Products and Factories’ initiative
passed a major sustainability milestone by diverting more than 900,000 t of
electronic waste from landfills around the world.

Bottom Line Benefits

The remanufacturing of products can lead to significant eco-efficiency gains (see

chart), reducing the resource consumption and waste production of Xerox as a
business. Parts that enter local repair programmes in the UK are reported to result in
annual savings of $4 million.

Wider Lessons

By bringing the product under their control Xerox have the opportunity and the
motivation to deal with both through-life and end-of-life issues. Some analysts
suggest that the strength of the Xerox remanufacturing based business model is
inherent in the type of products they produce – the products are large, robust, easy
to disassemble and valuable when remanufactured. The company has made a
substantial investment in developing the systems and technologies which support
a resource-efficient, service-based business model.
Toyota Motor Europe. Operates nine manufacturing facilities within the Greater
Europe area. These range from the two oldest, Burnaston and Deeside UK (1992),
to the newest in St Petersburg, Russia (2007). These plants operate a comprehensive
range of processes for engine and transmission manufacture and full vehicle
assembly operations.

What Trigger Is the Company Responding To?

Environmental protection is one of Toyota’s ‘Guiding Principles’, first issued in

1992, and further documented in the Toyota Earth Charter. Using these documents
as a blueprint for action and applying their management tools, including The
Toyota Way and The Toyota Production System, each region developed a series
of 5-year action plans. These plans set challenging targets to continually reduce
environmental impact and were disseminated to all levels of each plant. Toyota
Motor Europe (TME) is now part way through the fourth 5-year action plan.
56 F. Tonelli et al.

What Was the Response?

Taking the global aim of zero emissions and a roadmap towards the ultimate eco car
as inspiration for the manufacturing companies in Europe, TME developed their
own vision ‘Towards the ultimate eco factory’. This vision was based upon a strong
foundation of legal compliance and risk reduction, with special focus on four major
key performance indicators: energy/CO2, water, waste and air emissions (Volatile
Organic Compounds – VOC). These represent the most significant manufacturing
plant environmental impacts.

Bottom Line Benefits

By adopting these principles the European manufacturing environmental impact

was significantly reduced. In many areas significant cost savings have also been
realised. Toyota UK (TMUK) demonstrates this continual improvement since
1993:
Some practical examples of TMUK’s activities and achievements:
• Zero waste to landfill – achieved in 2003 (2 years ahead of target)
• Waste water recycling – 100,000 t of water saved per year
• CO2 reduction within the boiler house (4,500 TC02e per year below 2004 levels)
• Decoupling of CO2 emissions with increasing production volumes since 2003
• 25 % reduction in energy use per vehicle in paint booths

Wider Lessons

TMUK and a plant in France, were selected as two of five global Toyota ‘sustain-
able plants’ which serve as best practice development models for the Toyota
organisation. These plants focus on achieving leading environmental performance,
increasing the use of renewable energies and ensuring the plants are in harmony
with their local surroundings. Toyota also contributes to a wider audience by
sharing information and activity with a wide range of interested parties.

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Carbon Emissions Management
and the Financial Implications
of Sustainability

Janek Ratnatunga and Kashi R. Balachandran

1 Introduction

1.1 The Greenhouse Effect

The balance of scientific evidence indicates that the world is facing significant risks
associated with the potentially damaging consequences of climate change. As
stated in the Garnaut Report (2008):
Climate change is a diabolical policy problem. It is harder than any other issue of high
importance that has come before our polity in living memory. Climate change presents a
new kind of challenge. It is uncertain in its form and extent, rather than drawn in clear lines.
It is insidious rather than (as yet) directly confrontational. It is long term rather than
immediate, in both its impacts and its remedies. Any effective remedies lie beyond any
act of national will, requiring international cooperation of unprecedented dimension and
complexity. While an effective response to the challenge would play out over many
decades, it must take shape and be put in place over the next few years. (The Garnaut
Climate Change Review, Final Report, 2008 p. xviii)

The Earth manages to regulate concentrations of greenhouse gases through a

system of sources and sinks. In nature, carbon – in the form of carbon dioxide (CO2)
and methane – is sourced or emitted by burning and rotting of vegetation and other
organic matter (called Carbon Sources). Conversely, CO2 is absorbed (or
sequestered) by trees, plankton, soils and water bodies, which are termed ‘Carbon
Sinks’. As can be seen, the contradiction that arises with regards to the Greenhouse

J. Ratnatunga (*)
School of Commerce, University of South Australia, City West Campus, GPO Box 2471,
Adelaide, SA 5001, Australia
e-mail: [email protected]
K.R. Balachandran
Stern School of Business, New York University, New York, USA
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 59
DOI 10.1007/978-3-642-37018-2_3, © Springer-Verlag Berlin Heidelberg 2013
60 J. Ratnatunga and K.R. Balachandran

Effect is that one of the main sources of CO2 is also its principle sink (i.e. vegetation
in various forms). This scientific contradiction then follows through to
contradictions observed in the norms and values of how the community deals
with the issue, how the discourse of the subject has been shaped, and also the
impact of social constructions such as emission trading schemes that have been
recommended as possible solutions.
Although there is a debate raging about the ‘true-cause’ of climate change, the
strict criteria of evidence-based science is now being replaced by knowledge
construction using the Precautionary Principle which reverses the burden of
proof and encourages a precautionary response when there is insufficient knowl-
edge to initiate preventative and control reactions (Snedeker 2003).1 In simple
terms, the principle states that “it is better to be safe than sorry”. Under this
principle, the imbalance in greenhouse gas emissions calls for greater attention
and precautionary measures to be implemented.
The debate on how best to tackle climate changes perceived to be impacted by
human activity has two distinct but interrelated approaches. These are called ‘start
of pipe’ and ‘end of pipe’ solutions. The former solution relies on finding alternative
sources to power our industries, buildings and motor vehicles. The latter relies on
the behaviour modification of countries, organizations and individuals to reduce the
consumption of power which must be obtained from high carbon emitting sources.
Both solutions also have two underlying catalysts for change: ethical, because it is
the “right thing” to do, and economical because we can save money and resources.
The international response to global warming and climate change was the Kyoto
protocol (under which over 150 countries have agreed to strive to decrease CO2
emissions).2 This protocol is largely economic/regulatory (i.e.) rather than ethical
or moral.
Under the Kyoto Protocol, a country can emit more CO2 than its assigned amount
only if it can simultaneously sequester the equivalent amount in ‘allowable’ carbon
sinks, which include afforestation and reforestation activities undertaken since 1990.3

1
In the fourth assessment report released by the Intergovernmental Panel on Climate Change
(IPCC), around 2,500 scientists and reviewers from 130 countries concluded that evidence for
global warming is now virtually indisputable (Carbon Disclosure Project 2008).
2
More recently, the Copenhagen Climate Summit (2009) attempted to establish a new legally
binding global climate framework for the period from 2012 when the first commitment period
under Kyoto expires. However, the high expectations for the conference were followed by more
diminutive outcomes. The conference was only salvaged by a last minute US brokered political
accord which was agreed to by several countries (and involved $US30B in new and additional
resources, including forestry and investments through international institutions), but it failed to
achieve broad consensus. The outcomes of the Durban Climate Summit in December 2011 are still
unknown at time of writing.
3
These have to be ‘incremental’, i.e. a new tree planted. Pre-1990 trees still existing are not
considered as sinks for carbon credit purposes, as they have reached maturity and are in ‘balance’
as to the amount of carbon sequestered and emitted. Some developed countries are giving
developing countries ‘grants’ to use in preventing illicit logging. Such grants are outside the
Kyoto protocol.
Carbon Emissions Management and the Financial Implications of Sustainability 61

Since Australia’s ratification in 2007, the United States is the only major developed
country that has not, as yet, ratified the Kyoto Protocol.4

1.2 Carbon Emissions Management Approaches

For businesses and individuals in countries subjected to strict CO2 emissions

reduction targets (under the Kyoto protocol or other regulation), it would necessi-
tate a number of lifestyle changes (from organizations and individuals in that
country) to achieve a substantial decrease in CO2 emissions. Examples of the
lifestyle changes that are required by governments, organizations and individuals
to reduce CO2 emissions were listed by the TIME Magazine (2007). A few of the
carbon reduction methods suggested for business were (1) change light bulbs to low
emission, (2) switch off lights at quitting time, (3) let employees work close to
home, and (4) buy green power, etc.. The carbon reduction methods suggested for
individuals were (1) to fly straight between locations, (2) hang up a clothes line, (3)
insulate your water heater, etc. These are mainly ‘end-of-pipe’ solutions.
As businesses and individuals modify their behavior to become more carbon
conscious, there could be a shift in world trade. In recent years, there has been a
significant shift from ‘localization’ to ‘globalization’, especially with the opening
up of China, India and the Eastern block (Levitt 2006). However, as more people
are encouraged to work closer to home, buy produce from the local farmer, and
have a ‘Green Wedding’ by buying wine and other consumables locally (TIME
2007), then a shift back to localization due to carbon related reasons is possible.
This shift in world trade has been termed as, ‘Carbalization’.
‘Carbalization’ is based on the concept of product-distance (in miles or kilo
meters), i.e. the distance a product travels to get to its place of final purchase for
consumption. Separate studies by the oil giant BP and the German Institute for Physics
and Atmosphere released earlier this year revealed the world’s shipping could have a
more serious impact on global warming than air travel.5 Although CO2 emissions on a
per-kilogram basis were significantly lower for shipping when compared with air
freight, it is distance that has been targeted as most imports of fast moving consumer
goods (FMCGs) are mostly imported via shipping lines. An example is given of
imported bottled water from Europe using approximately 80 kg of CO2 emissions per

4
Developing countries, including China, India and Indonesia, have ratified the protocol but are
‘exempted’ from reducing CO2 emissions under the present agreement, despite their large
populations, and high emissions levels. China ranks only behind the USA in carbon emissions,
and in some rankings is the number one emitter. Australia also has not, as yet, agreed to any
reduction targets, despite being the largest ‘per-capita’ polluter.
5
Annual emissions from shipping made up 5 % of the global total, while the aviation industry,
which is subject to far greater scrutiny, contributes only 2 % (Vidal 2007). CO2 emissions from
ships do not come under the Kyoto agreement, and therefore, only a few studies have been
undertaken.
62 J. Ratnatunga and K.R. Balachandran

metric tons of bottles to be shipped to Australia, whilst from Egypt it is 70 kg and from
nearby Fiji only 20 kg (Perkins 2007). The message from such analyses is similar to
the TIME magazine (2007) recommendations, i.e. buy from sources where the
product or service originates as close as possible to point of purchase.
Recently China (the second biggest polluter behind the USA in some studies and
the biggest polluter in others) has stated that economic considerations come first
and thus will only consider reducing carbon emissions as a secondary issue. Thus,
Chinese products will continue to be ‘cheaper’, not only due to cheap labor, but also
due to the non-inclusion of carbon costs. Countries that import such products will
not only adversely affect the economic viability of their own country’s businesses,
but also they will be the target of the Chinese ‘dumping’ carbon emissions on them.
The only way (other than forcing China to accept their responsibilities by negotia-
tion) is to place a countervailing tax on such imports (similar to that placed when
companies ‘dump’ products via transfer pricing) based on a fair allocation of carbon
costs to Chinese products. It is evident therefore, that striving for more efficient
carbon management by businesses and individuals for achieving sustainability
goals will have significant economic impacts on organizations and resultant finan-
cial implications.
Schumacher (1997) has recognized the inherent contradictions in orthodox
economic thinking, as follows: If one mistakes what is an end in itself, and treats
it as a means, then there is degradation of life. And conversely, if one takes what is
really a means to be an end and elevates it to the status of an end (e.g. cost
efficiency), then there is degradation of oneself.
Thus Schumacher (1997) would argue that the actions and impacts of the
behavioral responses to climate change by business entities should not necessarily
be monetized, i.e. that the reduction of CO2 emissions is a value in itself. This
indicates that individuals and business entities voluntarily take actions (mostly
‘end-of-pipe’ solutions) to reduce greenhouse gas emissions (Fig. 1).
Following the line of argument presented by Schumacher (1997), the financial
implications of such phenomena should report the consequences of CO2 emissions
reducing actions by business entities in terms of value to society, rather than in
monetized economic values.
Unfortunately, economic rationality gets in the way of the Schumacherian ideal,
in that voluntary responses by individuals and business entities have been minimal.
The Chicago Climate Exchange (2007), set up to trade in Voluntary Emissions
Reductions (VERs), closed in November 2010, due to a lack of business. Therefore,
the argument put forward is that the driver that will best elicit the appropriate CO2
emission reducing behavioral response from countries and business entities would
be a mandatory ration limit, with monetary consequences if this limit was
exceeded.6 This would have not only a Schumacherian consequence, but also a

6
One such scheme is a certified carbon allowances and trading scheme set up under Kyoto
principles. Other approaches involve some form of taxation, issuance of permits or imposition
of fines.
Carbon Emissions Management and the Financial Implications of Sustainability 63

Preconditions Intermediate Variables Consequences

Greenhouse Gas Reduction of
Emissions in Greenhouse Gas
Behavioral Emissions
Nature
Response by
Greenhouse Gas Business Change in Value
Emissions by Entities of Business
Humans Entity

Fig. 1 The Schumacherian ideal

Preconditions Intermediate Variables Consequences

Greenhouse Gas Reduction of
Emissions in Greenhouse Gas
Government Behavioral Emissions
Nature Intervention Response by
Greenhouse Gas (Emissions Business Change in Value
Emissions by Limits) Entities of Business
Humans Entity

Fig. 2 The carbonomics solution

resultant impact on the monetary value of the business entity. This is referred to as
the Carbonomics solution and could be both ‘start of pipe’ and ‘end of pipe’
responses (Fig. 2).
The carbonomics solution is that, in order to meet the quota targets accepted
under the Kyoto Protocol, countries can in turn, set quotas on the emissions of
business entities (and perhaps in the future, those of individuals). Thus, many
countries are considering ‘managing’ their CO2 targets through its regulation of
business entities and individuals in their own countries in four principle ways:
• By taxation. Here the government imposes a straight tax on CO2 emissions.
The advantage of this is that it is immediately implementable, transparent and
similar tax regimes could be harmonized around the globe perhaps under the
oversight of the International Monetary Fund. The disadvantage is that business
may absorb or pass on the tax to consumers, and not cut emissions (Tounson
2007).
• By imposition of a penalty. This is similar to a tax, in that any government fines
or penalties imposed on companies for exceeding some ration limit may be
absorbed or passed on the to consumers, and not cut actual emissions.
• By charging a fee to pollute. This license or permit to pollute up to a certain
ration limit is again similar to a tax, in that companies may absorb or pass the
cost on to consumers, and not cut actual emissions.
• By setting a carbon price. Here carbon credits7 or ‘permits’ are issued free or
sold or auctioned to business entities permitting the emission of a certain

7
A ‘Carbon credits’, also called a ‘Renewable Energy Credit (REC), represents one metric ton of
CO2 either removed from the atmosphere or saved from being emitted.
64 J. Ratnatunga and K.R. Balachandran

quantity of greenhouse gases in a particular period (i.e. a permitted quota).8 The

setting of floor and ceiling prices will be done by the Government, but trading in
these carbon credits will determine market price. This system is known as a ‘cap
and trade’ system. This will be discussed in more detail in the next section as it
appears to be one of the few approaches that will actually reduce CO2 emissions.
• By approving certain organizations to issue ‘abatement certificates’: These are
legitimate carbon credits, created by undertaking work to either increase the
capacity of sinks, or reduce CO2 emissions from sources. Here, greenhouse
performance levels are set whereby those that can deliver a particular product
with emissions below the ration or ‘cap’ can earn (create) abatement credit
certificates. For example, power stations can create credits to the extent their
greenhouse intensity of their electricity is lower than a predetermined level.9
Another example would be an organization that grows trees for the purposes of
CO2 sequestration and the creation of ‘accredited’ carbon credits.10 These abate-
ment certificates are then sold to polluters. As yet such credits are not part of the
booming international trade, but tend to be recognized and traded regionally.11
It is clear that the need for carbon emissions management will produce winners
and losers in both the product and allowances markets, and in organizations and
countries. In the products and services market the winners will be ‘low carbon
intensity’ firms and those that can pass on their carbon costs. Some of these firms
could earn windfall profits. The losers will be ‘high carbon intensity’ firms and
those that are unable to pass on their carbon costs. In the allowances market, the
winners would be countries ‘on-track’ for meeting Kyoto standards. These
countries (and companies within them) will have a higher proportion of required
allowances allocated free, and could earn windfall profits from the sale of these
allowances. The losers will be countries a long way from Kyoto compliance, that
will need to purchase a higher proportion of allowances from the market. In the rest
of this chapter, we discuss the financial implications of carbonomics on
sustainability; especially how the (global) costs and revenues of CO2 emissions
and sequestrations can be captured by accounting systems for reporting purposes;
built into the cost and prices of different products and services; and used for
strategic decision making in business organizations.

8
Some countries (e.g. the UK) were considering providing each of their citizens an annual carbon
emissions quota via a ‘personal allowance’ ration card which would have to be handed over every
time a form of non- renewable energy was purchased – at the filling station, or when buying tickets
for a flight – for points to be deducted. This possibility has diminished due to political considerations.
9
This approach is known as a Solution-based market that prescribes targets in terms of units of
production from a prescribed sub-section of abatement technologies such as megawatts-hours of
electricity generated from renewable energy.
10
In New South Wales, Australia, companies that carry out work to reduce greenhouse gases can
create ‘Abatement Certificates” under the Greenhouse Gas Abatement Scheme. These are then
purchases by polluters such as Electricity retailers who have been imposed annual reduction targets.
11
Since 2003, about 37 million tons (worth more than A$ 400 million) have been traded, making
NSW one of the largest carbon trading markets in the world. Dusevic (2007, p. 12).
Carbon Emissions Management and the Financial Implications of Sustainability 65

2 Financial Implications of Sustainability

Traditionally, the monetary basis on which the various stakeholders of business

entities make their investment and other commercial decisions, and evaluate the
results of those decisions, has been through the framework of financial accounting.
Due to the wide-ranging use of financial reports by multiple stakeholders, in order
to ensure the numbers reported can be relied upon, the profession has developed an
auditing and assurance framework which provides a ‘true and fair’ assessment of
such reports and the quantification of the economic values therein.
However, in terms of financial reporting, the current financial accounting infor-
mation systems appears to be ill-equipped to provide the framework required for
reporting to multiple stakeholders as to how an organization is meeting its environ-
mental sustainability responsibilities, especially the challenge of reducing global
warming (Ratnatunga 2007; Ratnatunga et al. 2011). While quantification in mon-
etary terms has been accounting’s sine qua non in reporting to shareholders on an
organization’s economic performance, it is also well documented that monetary
measurement alone can be severely limited when reporting on sustainability per-
formance issues. This is because the actions undertaken and the resultant impacts
cannot always be valued in monetary terms.12 Thus alternative social constructs
have been proposed (and used) to report on an entity’s corporate social responsibil-
ity (CSR), mostly using non-monetary measures. Despite these alternative social
constructs, however, the accounting profession worldwide (using orthodox eco-
nomic thinking) still seeks to parameterize the discussion within a conventional
accounting framework.

2.1 Cap and Trade Emissions Trading Schemes

An emission trading scheme (ETS) approach for reducing emissions has been
proposed in several international jurisdictions, as well as Europe and more recently
in Australia. Emission trading is an approach used to constrain pollution by
providing specific economic incentives to encourage companies to achieve carbon
reductions. An ETS is often referred to as a ‘cap and trade’ scheme. The govern-
ment sets a limit or cap on the amount of a carbon that a company can emit.
Companies are issued emission permits or rights from the government and are
required to hold an equivalent number of allowances (or credits) which represent
the right to emit a specific amount of carbon. Under an ETS, the total amount of
allowances and credits cannot exceed the cap, limiting total carbon emissions to
that specified level. Companies that need to increase their emission allowance will
have to purchase carbon credits from entities that pollute less. The transfer of

12
One cannot put a monetary value on the extinction of a species due to environmental
degradation.
66 J. Ratnatunga and K.R. Balachandran

carbon credits or allowances is referred to as a trade. In effect, the buyer is paying a

price for polluting, while the seller is being rewarded for having reduced carbon
emissions by more than the required amount. In theory, companies that can readily
reduce emissions most cheaply will do so, achieving the pollution reduction at the
lowest possible cost to society.
The European Union Emission Trading Scheme (EU ETS) first introduced
emissions caps based on 8 % reduction of emissions on the 1990 baseline. Allow-
ance trading started late in 2004, and the ETS scheme was initiated in January 2005.
Under the EU ETS, the governments of the EU Member States agree to national
emission caps which have to be approved by the EU Commission, allocate
allowances to their industrial operators, track and validate the actual emissions
against the relevant assigned amount, and require the allowances to be retired after
the end of each year.
While Australia plans to establish an ETS (now) by 2013, an effective and
transparent ETS presupposes a raft of regulatory and market mechanisms to be
established to ensure the smooth running of the scheme. Given the largely experi-
mental nature of the proposed ETS in Australia, there remains considerable uncer-
tainty as to full economic costs and other impacts to be imposed on Australian
industry, particularly for the largest carbon emitters.
The Garnaut Report (2008) noted that the implementation of an emissions
trading scheme will require resolution of issues relating to financial accounting
standards and tax treatment, including avoiding distortions between the purchase of
emissions permits and other options for meeting emissions targets – that is, pursu-
ing tax neutrality between purchasing a permit, undertaking capital expenditure to
reduce or sequester emissions, investing in research and development or reducing
production. To be effective, the Garnaut Report (2008) states that an ETS must be
established on some basic guiding principles including:
Principle 1: Scarcity needs to be aligned with the emissions target – in other words,
the quantity of permits must reflect national emissions reductions targets and
trajectories. Scarcity of permit supply needs to be a certainty to avoid risk
discounts and premiums, due to suspected quantity increases or decreases,
being factored into prices.
Principle 2: Credibility of institutions. Trading scheme institutions must be of an
enduring and credible nature, without which there could be a rapid collapse of
any established carbon trading market. Further, institutions must be sufficiently
robust to withstand political pressure for arbitrary changes. Finally, operating
rules of these institutions must also be “reliable, steady and transparent”.
Principle 3: Simplicity of rules. Rules of the scheme should be easily implemented
and explained. A consistent approach in implementing the rules will be impor-
tant, while any “special rules concessions and exemptions should be avoided”. A
reduction in the simplicity of the scheme will result in more uncertainty and
possibly increased transaction costs.
Principle 4: Tradability of permits. To achieve these permit characteristics the
benefits they bestow must be (i) unambiguous, (ii) their terms and conditions of
Carbon Emissions Management and the Financial Implications of Sustainability 67

trade need to be commonly understood, (iii) there needs to exist ready access to
the market, (iv) transactions should be at minimal cost and (v) offer and bid
prices need to be transparently available.
Principle 5: Integration with other markets. The emissions trading scheme must be
able to coexist and integrate with international markets for emissions
entitlements as well as with other financial, commodity and product markets in
the domestic and international economy.
Not only would the introduction of a carbon trading scheme in a country have an
impact at the business organization level, it could also be argued that the monetization
of CO2 emissions can actually help at the local community level in terms of
sustainability if a carbon emission trading (monetized or bartered) becomes a wide-
spread phenomenon. Such a scheme could, arguably, result in significant changes in
the countryside of many countries. For example, farmers and others in local
communities have worked hard to get rid of their trees because they hindered
agriculture, or were required for building and even for fuel. Although in many
countries such logging was illegal, there were no monetary incentives to prevent
such activity. Now, post-Kyoto, the world recognizes that these very trees deserve a
bit more ‘credit’ than that, and appear to be willing to pay money for the carbon
sequestration abilities of these trees. Local farmers wanting financing to grow trees
for various reasons, including preventing soil erosion, will now be paid by brokers
acting on behalf of carbon emitters to undertake this activity. A cost in earlier times
would now become a revenue source. Those arguing this position would thus claim
that the capital market system may actually save the world (which, after all, is the
ideal that Schumacher is after). The proponents of this view see this as a clear example
of how orthodox economics may well create the platform for global sustainability.

2.2 Carbon Emission and Sequestration (CES) Accounting

The mechanism for calculating the quantum of CO2 either emitted by a source or
sequestered in a biomass sink is referred to as ‘carbon accounting’. This has very
little to do with monetary values usually associated with the term ‘accounting’.
Therefore, in this chapter it will be referred to it as ‘carbon emission and sequestra-
tion (CES) accounting’. Any CES accounting mechanism must be sufficiently
robust that the carbon trading market has confidence that the amount of carbon
sequestered can be both measured and considered to be equivalent in its impact on
global warming potential to the CO2 released to the atmosphere from activities
producing greenhouse gases.
As can be appreciated, the detailed requirements for a CES accounting system
are continually being developed by organizations such as the Intergovernmental
Panel on Climate Change13 (IPCC 2007) Any CES accounting standard developed

13
The IPCC along with Al Gore, the former USA Vice-President, won the 2007 Nobel Peace prize
for their work on reducing global warming.
68 J. Ratnatunga and K.R. Balachandran

by a country or NGO will need to be consistent with the IPCC principles before
credits generated from carbon sinks can be used in an emissions trading regime
under the Kyoto Protocol.
The accounting profession would want one standardized system (one size fits all)
to use pertaining to CES measures. The danger here is the possibility that the system
adopted would serve vested interests of business organizations (that are principally
polluters) at the expense of other stakeholders. These other stakeholders would
therefore applaud the lack of standardization in the early days of grappling with
such measures; with the view that the measurement systems that survive would be
the ones that are adaptable to varying stakeholder requirements (see Stafford Beer
1975). The surviving CES measurement systems should, however, be subject to
some regularity and transparency requirements, especially if the CES measures are
to be priced for trading.
Unfortunately, the current situation is that, although the interest in the carbon
trading market is high, the new market is largely unregulated and lacks transpar-
ency (Ratnatunga and Balachandran 2009). Government policy in countries such as
the USA and Australia is in a constant state of change, and questions of measure-
ment and pricing required for an efficient trading system are far from settled. In
essence business organizations and individual customers14 have no way of discrim-
inating between the providers who claim that in their scheme is better able to
measure (for example) that (Tandukar 2007):

X trees ¼ the sequestration of Y tons of CO2 emissions ¼ $Z (1)

Although Schumacher (1997) would probably prefer the equation to be limited

to the first two variables, i.e. view the sequestration of Y tons of CO2 emissions to
be a value in itself, the introduction/existence of a carbon emissions trading market
will enable the third variable, a monetary value ($Z) to be determined. In turn, as
there will be real dollar transactions involved, these monetary values will need to be
reported in organizational financial statements under current Generally Accepted
Accounting Principles (GAAP) of most countries.
However, without agreed CES measurements, the variation possible in the
middle section of the equation could lead to gross distortions of whatever dollar
value was offered in a carbon trading exchange; i.e., as the sequestration or
emissions measured could be a range of values (rather than a deterministic ‘agreed’
value) so would the dollars received or paid for such.
Whatever the methodology or approach that is ultimately ‘agreed’ in terms of
CES measures, the issue for the accounting profession is the monetary value ($Z) of
the CO2 that these CES Accounting measurements say has been either removed
from the atmosphere or saved from being emitted by an organization’s products,

14
Sergey Brin, the founder of Google is reported as having bought carbon credits to offset the
immense amount of CO2 emitted by his private Boeing 767, but confesses he is not sure if it really
achieves anything (Krauthammer 2007).
Carbon Emissions Management and the Financial Implications of Sustainability 69

services, equipment and processors. The existence of an efficient carbon trading

market would be able to put a price on this in terms of a Carbon Credit (or
allowance). In addition, the traditional accounting reports would need to recognize
that certain non – current assets (or liabilities) could also give rise to future carbon
related revenues and expenses. Such balance sheet items may have a ‘market’ for
the tangible asset (e.g. a power plant or forest), but not for its related intangible
asset or liability, i.e. the CO2 sequestration or emissions ability of such CO2 sinks
and sources. If you buy or sell the tangible, you would need to consider the value of
the related intangible (see Ratnatunga et al. 2011 for a detailed discussion of this
issue).
In such instances, the accounting profession would need to obtain the services of
outside consultants, such as environmental scientists and biologists to undertake
CES accounting projects. The use of such external experts is not uncommon,
however. The accounting profession often incorporates reports from company
directors, actuaries, business analysts, engineers, quantity surveyors, lawyers etc.,
especially in the area of balance sheet asset valuation and fair-value accounting.
Using expert opinions in accounting for CO2 flows would be no different. However,
accounting standard setters have been reticent in accepting expert opinions as
balance sheet values of intangible assets, and one could envisage them having
concerns with values generated via CES accounting.

2.3 CES Accounting: Assurance and Verification

An important issue in the discourse on CES accounting is that of assurance and

verification. An entity’s carbon accounts will need to be independently verified by
qualified assurors before they are accepted for use in an emissions trading regime.
There needs to be accountability, transparency and integrity in relation to compli-
ance arrangements, especially in relation to the inputs that are going into such a
trading scheme. If such assurance is not present, then business organizations are not
going to have comfort or certainty in investing in such a market.
Before any ‘assurance’ can be given, however, the framework for reporting must
be first agreed upon, i.e. a necessary condition for an assurance engagement is that
first the reporting framework is accepted as suitable criteria for CES accounting.
We have already discussed, however, the confusion in the plethora of measurement
protocols available for CES Accounting.
Currently, similar to the situation regarding numerous CES Accounting
methodologies and approaches, the auditing and ranking of environmentally sus-
tainable initiatives is in chaos with dozens of organizations offering accreditation
and auditing services, across the globe, but none being committed to a standardized
methodology for auditing or reporting corporate effort. Walters (2006) lists at least
11 such organizations, none having standards compatible with another. The most
commonly used methodology is the Global Reporting Initiative (GRI 2007).
70 J. Ratnatunga and K.R. Balachandran

From the above discussion it is clear that there are many vested complementary
and conflicting interests driving the discourse on carbon emissions trading. How-
ever, the (financial) auditing profession has been slower than the organizations
listed in Walters (2006) in providing assurance standards and therefore has had only
a very limited impact on how the discourse is being shaped. This is despite the
anecdotal evidence that indicates that the auditing profession is ‘salivating’ at the
potential of conducting CES audits.
To date however, the auditing profession’s own input to the discourse has been
very limited with significant contradictions and resistances engendered by environ-
mental accounting techniques resulting in incomplete efforts of accountants and
their allies to overcome them (see Lohmann 2009). The International Auditing and
Assurance Standards Board (IAASB) has issued IASE 3000, Assurance
Engagements other than Audits and Reviews of Historical Financial Information
(IAASB 2004) to cover the assurance on sustainability reports. It is a framework
that applies equally to assurance engagements on historical financial information
and on other information. In a country that has adopted ISAE 3,000, any assurance
engagement on other than historical financial information is to be undertaken by the
auditing firms in accordance with ISAE 3,000. The American Institute of Certified
Public Accountants (AICPA 2005) also put out Statement of Position 03–2: Attest
Engagements on Greenhouse Gas Emissions Information, but this provides very
little in terms of detail.
It must be pointed out that ISAE 3,000 is a very general standard for assurance
engagements that covers a wide range of possible subject matter, with sustainability
being just one. Due to the broad scope of sustainability, numerous challenges exist
regarding the suitable criteria required to fulfill the assurance requirements of
relevance, completeness, reliability, neutrality and understandability. The IAASB
approved a project in December 2007 to address professional accountants’
responsibilities with respect to assurance engagements on carbon emissions infor-
mation. This project concerns professional accountants’ responsibilities with
respect to assurance engagements on carbon emissions information. It will consider
what specific guidance is necessary beyond the general requirements of ISAE
3,000. The project hopes explore the need for guidance regarding assurance about
carbon offsets. Also, while not a primary focus of the project, the IAASB is of the
view that an ISAE on this topic will likely be of assistance to financial statement
auditors when considering the carrying value of emission trading rights. The final
output of this project is likely to be a new International Standard on Assurance
Engagements (ISAE).
An organization called AccountAbility, with its assurance standard AA1000 AS,
has been one of the first groups providing guidance on assurance for sustainability
assurance engagements (Mock et al. 2007). AccountAbility recently enhanced the
AA1000 AS assurance standard by issuing a Guidance Note on the Principles of
Materiality, Completeness and Responsiveness as they Relate to the AA1000
Assurance Standard AccountAbility (2007).
It will be perhaps easier to build assurance standards for carbon emissions
reports as the subject matter is more easily defined and measured (especially
Carbon Emissions Management and the Financial Implications of Sustainability 71

when an efficient carbon emissions trading market exists). However, to date, no

specific carbon emission standard has been released by any professional accounting
organization. Neither AA1000 AS nor ISAE 3,000 provides specific guidance or
standards regarding CES accounting assurance. This has stifled the auditing
profession’s responsiveness in undertaking engagements relating to climate change
issues. The problem remains that until proper CES accounting standards are agreed
to, there would be significant constraints in developing specific standards for
undertaking CES assurance.

3 Carbon Financial Statement Accounting

From the foregoing discussion, it can be seen that the discourse on the reporting of
the monetary values generated by CES accounting measures, is dominated by
orthodox economic thinking and not Schumacherian meta-economic logic of con-
sidering CO2 sequestration activity as a value in itself. However, the traditionalists
would argue (as a point of conjecture) that just as the price-mechanism was the
‘invisible-hand’ of commerce (Smith 1776), the carbon price would be the invisible
hand that enables the Kyoto protocol to be expressed in terms of the interconnec-
tedness between humans and nature.
The conventional means by which economic activity is reported is via financial
accounting and the resultant financial statements. However, interesting financial
accounting issues and controversies arise in the suggested conventional treatments
of accounting for credits depending on if an allowance or credit is:
• Granted free to a business entity by a government,
• Purchased in an auction run by a government,
• Purchased in a free-market, or
• Created by an organization allowed by an International or State Authority to
issue them.
The main issues revolve around typical questions that arise within the conven-
tional GAAP paradigm. It will be demonstrated that the position of the financial
accounting profession to issues raised by carbon trading is by no means clear, and
most recommendations are fraught with controversy and contradiction. The main
problem is that the accounting profession wants to apply their one size fits all
method to all measures; a position that may not be viable in a new carbonomic
paradigm. For example, if a particular country’s government rations CO2 emissions
via a ‘cap and trade’ allowance scheme, then that allowance will have a monetary
value and the following questions will follow: Does the requirements of the Kyoto
Protocol give rise to an asset (carbon sink) or a liability (carbon source)? If a
separate asset is recognized, what is the nature of that asset? Is there ‘income’ when
the allowance is received, or is income deferred until the allowance is traded? If
income is recognized, how is it measured? Should the potential penalty, which will
be incurred if a participant fails to deliver sufficient allowances to cover its actual
72 J. Ratnatunga and K.R. Balachandran

emissions, be recognized as a contingent liability, and if so, how should it be

measured?
Note that these are right questions to ask only if carbon emissions are placed
within a traditional framework where carbon sinks as assets and emissions as
liabilities are seen from the perspective of an organization (i.e. shareholder
interests); rather than from a Schumacherian perspective. However, as we have
no other models of measuring the effects of carbon emissions and sequestration (as
yet) we should at least try and fit them into a traditional model and see whether the
results make any sense. Therefore, these and other questions (and contradictions),
and suggested answers and solutions within the conventional paradigm will be
discussed in this section in order to understand how the discourse is shaping within
the profession.
Some in the accounting profession have argued that a rationed ‘carbon
allowance’ is an intangible asset; i.e. a “right to pollute”. For instance, Interna-
tional Financial Reporting and Interpretations Committee (IFRIC) issued IFRIC
3 ‘Emission Rights in March 2004 which proposed measurement and disclosure
rules for ETSs. IFRIC 3 required that:
(i) Rights (allowances) are intangible assets that should be recognized in the
financial statements in accordance with IAS 38 Intangible Assets.
(ii) When allowances are issued to a participant by government (or government
agency) for less than their fair value, the difference between the amount paid
(if any) and their fair value is a government grant that is accounted for in
accordance IAS 20
(iii) As a participant produces emissions, it recognizes a provision for its obligation
to deliver allowances in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. This provision is normally measured at the
market value of the allowances needed to settle it.15
Depending on the business, it could be argued that this category of intangible
assets can be accounted in three ways: as items of inventory if the organization is set
up to trade in ‘allowances’; as financial assets; and as derivatives by accounting for
them as a cash flow hedge. If it is considered a financial asset, the allowance could
be reported as a new category of intangible asset, i.e. one that could be measured at
fair value with changes in value recognized in profit or loss.16

15
However, IFRIC 3 was unpopular in Europe and was subsequently withdrawn in June 2005.
Financial reporting and valuation issues relating to ETSs were reintroduced on the IASB agenda
December 2007; however the IASB still appears to be a long way from developing a comprehen-
sive standard on carbon emission rights.
16
If intangible assets arise due to a third party transaction such as a purchase of a carbon
allowance, then it can meet the accounting profession’s reliability test. However, carbon credits
created internally by carbon sinks cannot be recognized until they are sold in open trading. An
inconvenient truth is that the profession has great difficulty with internally generated intangible
assets such as brand values and intellectual property, and it is still coming to terms with reporting
issues arising due to carbon trading.
Carbon Emissions Management and the Financial Implications of Sustainability 73

The counter argument is that, for many organizations, the existence of govern-
ment and other controls (rationing) in the carbon emissions area would more likely
result in a liability situation, if the entity’s CO2 emissions are greater than the
allowable ration granted (or purchased).
Following these different viewpoints, the profession has recognized at least three
treatments of carbon allowances even within the traditional accounting framework
as follows:
(1) If the allowance is obtained as a government grant (when allowances are
allocated by governments for less than fair value) then it is first recognized as
an intangible asset at cost (debit: intangible asset; credit: cash). Then, the
intangible asset is increased to fair value with the difference between cost
and fair value recognized as revenue on a systematic basis over the compliance
period (debit: intangible asset; credit: revenue).17 As an organization emits
carbon the intangible asset is used up at market value (debit: expense; credit
intangible asset). Any gains or losses that result in disposing of the intangible
asset are recognized in the income statement.
(2) If the allowance is purchased as an asset, then it is recorded at fair value
pertaining to the carbon allowances held (debit: intangible asset; credit: equity
reserves).18 Again, as an organization emits carbon the intangible asset is used
up at market value (debit: expense; credit intangible asset).
(3) If under a carbon rationing scheme a liability arises for the obligation to deliver
carbon allowances equal to emissions that have been made, then it is recorded
at fair value (debit: expense; credit: liability), and ultimately purchasing in an
open market ‘carbon credits’ equal to the shortfall (debit: liability; credit: cash)
at market value.19
To account for such treatments in a carbon rationing scheme, a net model has
been proposed whereby an entity does not recognize allocated allowances (they
remain off-balance sheet), and accounts for actual emissions only when it holds
insufficient allowances to cover those emissions by buying carbon credits (debit:
expenses; credit: cash) at market price.
Traditionally, however, the accounting profession prefers the separate recogni-
tion of assets and the liabilities and the different treatment of such; i.e. to treat
carbon assets (i.e. allowances) independent of the liabilities (i.e. obligations).
Accordingly, netting off (i.e. offsetting) of the assets and liabilities in such cases
will not be permitted.

17
Questions as to whether such revenue is taxable or exempt from tax will be based on a specific
country’s tax policy.
18
The fair value would be based on market values if a trading scheme exists. Similar questions of
‘fair value’ pertain to share investments, i.e. there are reporting differences if the shares are held as
‘investments’ or as ‘inventory’ in a fund management company.
19
Note that a ‘Liability’ is a present obligation arising from past events. The issue of a ‘carbon
permit’ relating to a possible future event is more a contingent liability, although the IASB has
recommended abolishing this latter term.
74 J. Ratnatunga and K.R. Balachandran

Thus an amortizing model has been proposed whereby an entity recognizes

allocated allowances as an asset (debit: asset; credit: equity reserves as deferred
income) at cost price, but then amortizes the allowances as it pollutes (debit:
expense; credit: asset) and simultaneously release the deferred income to revenue
(debit: equity reserves; credit: revenue). In this method, the entity recognizes a
liability for actual emissions only when it holds insufficient allowances to cover
those emissions (debit: expense; credit: liability). The liability that the entity incurs
as it emits is measured at the cost of the allowances held by the entity. However,
ultimately the entity has to purchase ‘carbon credits’ in an open market equal to the
shortfall (debit: liability; credit: cash), and there would be an over/under provision
of this liability depending on market price. Clearly, pricing and the valuation of
carbon allowances (permits) is a key to this method of accounting.
In the United States, the guidance contained in the Federal Energy Regulatory
Commission’s (FERC) Uniform System of Accounts is the only accounting guid-
ance currently available that explicitly addresses emission allowances. FERC
requires business entities to recognize emission allowances on a historical cost
basis. The Financial Accounting Standards Board (FASB) has researched the actual
practices of business entities, and reports that whilst there is a diversity of practices,
most follow the FERC guidelines. The FASB also reports that some business
entities follow an intangible asset model for emission allowances and that there is
no authoritative guidance that addresses the accounting for carbon credits.20
Other guidelines have been issued, but often withdrawn subsequently. For
example, the Emerging Issues Task Force (EITF) Issue No. 03–14 Participants’
Accounting for Emissions Allowances under a ‘Cap and Trade’ Program,
attempted to address emission allowances by providing a comprehensive account-
ing model for participants in a cap and trade emission reduction program and
alternative views for classification. This was removed as it was seen by some to
have implications beyond cap and trade emission programs and by others as
irrelevant as they did not perceive a practice issue or diversity in the accounting
for emission allowances.
Another example of the unfocused discourse in the accounting profession was
the International Financial Reporting Interpretations Committee’s IFRIC 3: Emis-
sion Rights that attempted to address how participants might account for cap and
trade emission trading schemes. IFRIC 3 stated that allowances are intangible assets
and should be measured at fair value when received from the government. The grant
of allowances was to be recognized as income on a systematic basis over the
compliance period.
However, in 2005, the International Accounting Standards Board (IASB) voted
to withdraw IFRIC 3 in light of (a) the reduced urgency for an interpretation, (b)
requests from the IFRIC to amend IASB standards, and (c) concerns expressed by
the European Commission. In late 2005 the IASB decided to add a project to its
agenda to provide a comprehensive model for emission allowances similar to issues

20
http://www.fasb.org/project/emission_allowances.shtml (accessed April 18, 2007).
Carbon Emissions Management and the Financial Implications of Sustainability 75

discussed in IFRIC 3. This is yet to be released. In a recent paper Cook (2009) states
that one such solution for the IFRIC to consider is to maintain the status quo.
A further example of the financial accounting profession’s inability to deal with
the issue is that after the FASB Statement No. 153 Exchanges of Nonmonetary
Assets was issued in December 2004, questions arose in practice related to its scope
and, specifically, whether exchanges of emission allowances (vintage year swaps)
should be accounted for at fair value or on a carryover basis. In August 2006, the
Technical Application and Implementation Activities (TA&I) Committee approved
a recommendation for the Board to add a project to its agenda to address the nature
of emission allowances and clarify the accounting for vintage year swaps of
emission allowances by participants in emission trading schemes. This project
also is yet to report.
In Australia, carbon allowances that are to be obtained via a rationing system
(that is proposed to be introduced in 2013) would probably be seen as government
grants, and thus fall under the Australian Accounting Standards Board’s AASB
120 Accounting for Government Grants and Disclosure of Government Assistance
standard, which states that such grants are intangible assets, and must be recognized
as income over the periods necessary to match them with the costs for which they
are intended to compensate. This, in effect, is the amortizing model, but there is
some debate as to the recognition of ‘deferred income’. As the IASB has stated that
only assets and liabilities may be shown on the balance sheet, then revenue received
but not yet recognized as income (i.e. deferred income) is not a liability and thus
cannot be shown on the balance sheet. But it cannot be shown as an Equity Reserve
either, as AASB 120 states that government grants cannot be credited directly to
shareholders’ interests. There is clearly contradiction and confusion here.
Even if the IASB decides to recognize deferred income as a balance sheet item,
the release of the government grant to revenue by reference to the initial value of
the allowances can also cause volatility as the liability that arises as the entity emits
is measured by reference to the current market value of the allowances. Even if the
entity elects to measure the allowances subsequently at market value, a mismatch
arises because some gains and losses are reported in the income statement and
others in equity.
Thus it can be seen that under the amortizing model, carbon allowances/
liabilities could represent a significant figure that potentially could have an impact
on the “bottom line” volatility of a company’s reported financial statements. This
perceived (artificial) volatility in the income statement would be a major concern
for CFOs, as they would have to record a gain in the value of emission rights to
equity, but the loss related to revaluing the liability as a profit or loss item. Further,
the current traditionalist thinking is that they would need to record a loss in the
value of emission rights against previous gains recognized in equity, but the gain
related to revaluing the liability would be recorded in profit or loss.
The accounting treatment is a little clearer in Australia for reporting ‘uncondi-
tional government grants’. This is covered by AASB 141 Agriculture. An uncondi-
tional government grant must be recognized as income on receipt. However, a
conditional government grant is recognized as income on receipt only when certain
76 J. Ratnatunga and K.R. Balachandran

conditions are met. Further, even if it could be argued that a carbon permit issued to
offset increased future costs arising from a cap and trade scheme is a conditional
government grant, the issue of recognizing deferred income remains. If the carbon
permit is not recognized as even a conditional grant, all the income needs to be
recognized (and taxed) in year of receipt, even though the related cost is in a future
period, thus effectively negating the matching principle of GAAP.
Issues that are still to be considered by the accounting profession are on how to
account for allowances and obligations if there is no active market,21 and the
accounting requirements of brokers and other position-taking institutions that are
not subject to an emission limit or cap. The non-existence of a market price would
be seen as not meeting the reliability and relevance test required in conventional
accounting reporting.
The most concerning issue, however, stems from the failure of conventional
GAAP to recognize and measure intangible assets that are not acquired. This failure
presents a significant problem in accounting for carbon sources and sinks that are
not acquired (such as the internal development of assets with the potential to
generate future RECs). In this area, a shift in conventional thinking is required
(see Ratnatunga et al. 2011).
Here, business entities will also need to consider issues such as fair value
accounting22 and impairment of assets. As fair value accounting and asset
impairment tests are still the subject of much debate in the profession with regards
to even conventional tangible asset valuations, an inconvenient truth is that business
entities to date have very little guidance from accounting and assurance standard
setters as to the treatment of carbon related intangible assets (and intangible
liabilities), especially those that are internally generated (i.e. not acquired).
Finally, the unique tangible/intangible nature of carbon related assets makes
their accounting treatment under conventional accounting frameworks fraught with
difficulty, especially in organizations such as forestry companies that have carbon
sequestration assets (sinks). These entities may find these ‘assets’ instantly becom-
ing carbon emitting sources (liabilities) should their trees be destroyed in a forest
fire. Whilst accepting that there are situations in business life that organizational
assets contain elements of contingent liability, such that in the instant the asset is
wiped off the books a liability arises; most of these contingent liabilities are
litigious in nature. A plane (tangible asset) that crashes, or a dangerous side effects
that is discovered in a drug patent (intangible asset) may not only wipe out the
assets from the balance sheet, but also simultaneously give rise to a class action

21
Pricing of allowances may be difficult to determine in the absence of a liquid market: The
suggested approach of adopting mark-to-market accounting could have a significant impact on a
company’s profit and loss. The volatility in prices would need to be reflected in the income
statement; as such profit and loss figures could be subject to disturbances with severe price spikes
(that could easily happen in a thin market).
22
This pertains to intangible assets with the potential to generate future carbon credits, and not the
value of the credits themselves, i.e. in the case of tangible assets, the value of the machinery, not
the value of the inventory produced by the machinery.
Carbon Emissions Management and the Financial Implications of Sustainability 77

contingent liability.23 However, carbon sinks such as trees are simultaneously

carbon sources as well, as they shed leaves etc., whilst growing. Thus any metric
to value the carbon sequestration capabilities of these assets must simultaneously
capture their carbon emission capabilities. Ratnatunga et al. (2011) suggest that
such a valuation model should not value assets (what an organization ‘has’) but
instead value capabilities (what an organization ‘can do’).

4 Carbon Business Accounting

From the discussion earlier on carbonomics, carbalization and carbon emissions

trading, it can be seen that business entities will need to consider new business
practices in order to take advantage of (or at least not be disadvantaged by) the
mandatory carbon rationing and trading schemes under the Kyoto protocol. The
existence of a carbon rationing and trading market has the potential of affecting an
organization’s business strategy, financial performance and ultimately value, and
thus accountants and other business information providers need to consider
measurements and strategies outside of conventional paradigms.
This requires a good understanding of a number of elements of cost management
and management accounting, and also of economics and business finance in an
integrated manner, such as the economic modeling of demand and supply of carbon
credits and allowances, forward and spot pricing, financial analysis, cost analysis
and risk analysis, risk management of reputation, business support, cash flow and
business value, capital allocation and the (possible) International Financial
Reporting Standards (IFRS) directives for financial reporting of carbon emissions
management and related transactions. In addition, taxation issues of direct carbon
taxes, value-added (VAT) and goods and services (GST) taxes, and transfer pricing
implications of carbon trading need also to be considered.
In this section of the chapter, it will be seen that some of the classic ideas of cost
accounting may be central to the study of ‘carbon costs’. The costing scheme
proposed in the paper is shown to be a good fit with the traditional life-cycle
analysis of overhead cost allocations, where the overhead in question is the costs
of reducing global warming. It is demonstrated that if the overhead is allocated in a
precise fashion over the life of a product or service, goods and services that seem to
be low cost from a product costing viewpoint become high cost from a life-cycle
viewpoint and perhaps should not be manufactured or provided. Once product costs
are known, the wider issues of strategic business accounting (comprising manage-
ment accounting and business finance) need to be considered.

23
The IASB is, however, considering abolishing the term ‘contingent liability’.
78 J. Ratnatunga and K.R. Balachandran

4.1 Carbon Strategic Cost Management

Traditional cost management relates to accounting for direct and indirect costs24
and the assignment of such costs to cost objects such as products, services,
customers and organizational processes. A cost can be attached ‘directly’ to a
cost object if it is traceable solely to that cost object; and if not, it is allocated
(see Sharma and Ratnatunga 1997 for a comprehensive discussion of costing
systems). Recent discussions in the cost accounting literature have been mainly to
do with the allocation of indirect costs; i.e. if using Traditional allocation systems
with a single cost driver (such as direct labor) or using Activity Based Costing
Systems (with multiple cost drivers) better describes the cause-effect relationships
found in products, services, customers and organizational processes (Cooper and
Kaplan 1988). In product costing, the ‘cost’ is computed up to the stage that goods
are available for sale. Costs incurred subsequent to the product being sold are
usually not calculated, except in the case where a product carries a warranty, or
some other after-sales service component; then the expected cost (based on a
probability estimate) of that service is incorporated into the cost (and therefore its
price). Some costings may also include the cost of money blocked in accounts
receivable, i.e. the credit period being treated as an ‘after-sales service’ that has a
cost associated with it.
Carbon cost management is a subset of the push towards ‘environmental cost
accounting’ (see Mathews 1997, Adams 2004) that highlights the cost impacts
‘beyond’ those related to a specific cost object such as a product. Let us take a
product such as a computer printer as an example. Typical environmental costs
(both prior and subsequent to the sale) are:
Raw Material: The environmental costs are simply the cost of the raw materials
such as plastics, cartridges and steel in ‘waste’. Much of such raw material is
brought into ‘usable form’ for manufacturing using significant energy and thus
has related CO2 emissions.25 Every time a raw material is used and does not
become a product, it becomes waste. Even when such material become saleable
products, when the product becomes obsolete it goes into landfills as waste.
Labor: Labor requires energy to function, such as traveling time to a production
facility and air conditioning etc. at the facility, and thus there are significant CO2
emissions associated with its use. Prior to the sale of the product, the typical
labor environmental costs would be the labor component of an off-specification
product that becomes waste. Post sale, the labor costs that are required for
re-cycling of parts is an environmental related cost, which also generates CO2
emissions.

24
These cost categories are based on the nature of the expenditure items, such as the cost of raw
materials, human input (labor) and overhead (rent, depreciation etc.)
25
Such as the energy used in mining and processing the materials.
Carbon Emissions Management and the Financial Implications of Sustainability 79

Overhead: Utility costs, such as water and energy, are also often overlooked in
determining the true cost of waste generation, both before and after a sale. These
costs are a significant item in CO2 emissions management.
Waste Management: The most obvious environmental expenses are the treatment
and disposal costs of waste generated in the production process. Again these
require significant energy and thus have associated CO2 emissions. Other waste
management costs may include the expenses to collect samples, paper work,
permit fees, consulting fees, and (potentially) fines for violations. The flip side of
the hidden costs and impacts of waste generation is the hidden benefits resulting
from actions taken to improve the environmental performance of a particular
facility.
Recycling: This is a form of waste management at the obsolescence end of the
product life cycle. This requires a three pronged approach: (1) the opportunity
cost calculation (including the environmental impacts) of recycling components
of existing hardware vis-à-vis using new components (2) locking in recycling
cost efficiencies at the design stage of new hardware (3) using a cost-benefit
analyses of the first two stages to influence Government policy on tax credits etc.
for undertaking such environmentally sustainable programs. The
U.S. Environmental Protection Agency (EPA) has an Environmental Account-
ing Project which encourages business to understand the full spectrum of their
environmental costs and integrate these costs into decision-making.26
Note that in undertaking a life-cycle costing exercise using carbon allowance
costs, the issue of transaction costing versus opportunity costing needs to be
recognized. Some studies may take an opportunity cost approach and determine
that the freely allocated allowances are worth the same as purchased allowances.
Others may take a more transactional ‘environmental compliance approach’ and
treat as a ‘hard cost’ only the cost of purchased allowances over the year.
As pointed out before in discussing CES accounting and assurance, there are
many ‘accreditation’ approaches in the environmental arena all having different
measurement metrics. These measurement approaches also have a direct impact on
carbon cost calculations. Whilst no study or approach can be considered definitive,
there is clearly a need for accurate carbon cost accounting using life-cycle costing
techniques, that should not only consider costs to bring to the point of sale a product
or service, but also consider the carbon costs prior and subsequent to the manufac-
ture of the product or the performance of the service. Such costs are elaborated in
Table 1.

26
See http://www.epa.gov/oppt/library/pubs/archive/acct-archive/index.htm
80 J. Ratnatunga and K.R. Balachandran

Table 1 The whole-of-life impact of carbon emission efficiencies on costs and revenues

Areas of cost reduction or

revenue generation via
efficient carbon cost Post – sale environmental
management: Pre – sale environmental impact impacta
Raw materials Production waste Landfill waste
Human input Wasted time on rejects and Time to separate recyclable
recovery components
Traditional overhead expenses
Electricity All of these overhead items have carbon emissions that will affect if
Rental the organization is a net- sequester or net-emitter. Techniques
Marketing utilized to reduce CO2 emissions via using alternative energy
Transportation sources etc., will impact on the carbon credit cost item shown
Administration under the Environmental overhead category
Depreciation of machinery
After sales service costs
Environmental overhead
Regulatory costs Meeting emissions standards Litigation costs of environmental
pollution
Waste management Production waste Landfill waste
Recycling These costs can be reduced via the proper design of components at
Amortisation of design costs pre-production stage. Such design costs should be amortized
over life of product, via Life-Cycle costing
Carbon credits This can be a cost or revenue Purchase/sale of carbon credits
item depending on if the depending on if the
organization is a net- organization is a net-
sequester or net-emitter sequester or net-emitter
Financing costs
Stock holding costs These costs include cost of These costs include cost relating
capital, excess handling, to warranty returns such as
obsolescence, deterioration, excess handling,
stock administration and deterioration, stock
insurance administration and insurance
Debtors costs None These costs include cost of
capital and the risk of bad
debts
Carbon tax This tax could be an additional cost or revenue item (Tax Credit)
depending on if the organization is a net- sequester or
net-emitter
a
These post environmental costs can be incorporated into product costs using probability estimates

4.2 Carbon Strategic Management Accounting

The decisions requiring carbon emissions management cuts across a wide spectrum
of strategic issues, from overall objectives, to marketing, new product development,
pricing, international business, promotion, supply chain management, finance and
risk management. Clearly an integrative approach, such as that suggested by
Kaplan and Norton (2000) is required, with ‘carbon thinking’ being important
Carbon Emissions Management and the Financial Implications of Sustainability 81

part of the strategy-focus of the organization. This carbon-focused thinking will

require new tools and management practices if the accounting profession is to
remain at the forefront of providing relevant information for decision making in
this new economic paradigm of carbonomics. Ratnatunga and Balachandran (2009)
reported the results of a comprehensive survey that captured the totality of the
decision related issues emerging in the carbon space, which is presented in Table 2.

5 Summary

The concentrations of greenhouse gases in the atmosphere have risen dramatically

leading to an out-of-balance greenhouse effect that most scientists believe will
continue to cause a very rapid warming of the world’s climate. The possibility of
costly disruption from rapid climate change either globally or locally, calls for
greater attention and precautionary measures to be put in place. Governments,
business entities and consumers would be impacted by the extent to which such
precautionary measures are incorporated in their decision making process.
Despite Schumacher (1997) urging that such precautionary measures should be
undertaken for their intrinsic value, governments are taking a rational economic
view in considering ‘carbon regulation’ approaches. These regulatory approached
range from taxes and penalties to the issuing of licenses and permits to a full
Emissions Trading Scheme. All measures require the calculation of a carbon credit,
which represents one metric ton of CO2 either removed from the atmosphere or
saved from being emitted. Carbon credits are seen as the ‘invisible-hand’ of
reducing global warming by forcing business entities to consider issues such as
trading in carbon allowances (or permits); investment in low- CO2 emission
technologies; counting the costs of carbon regularity compliance and passing on
the increased cost of carbon regulation to consumers through higher prices.
It has been shown that the economic decisions of organizations operating within
a carbon trading scheme, and the consequences of the resultant behavioral
responses will impact the accounting profession significantly. Unfortunately, in
terms of financial reporting, the current financial accounting framework appears to
be ill-equipped to provide the information required by business entities to meet the
challenge of climate change. This is mainly because accounting information
systems based on the accounting equation are not designed to cope with the
valuations of intangible assets (and liabilities) such as CO2 sources and sinks. As
such, despite emissions trading being prevalent in most developed countries (within
and outside the Kyoto protocol), the accounting standard setters have yet to come
up with agreed methodologies relating to revenue, expense, asset and liability
values required to account for such activity. Whilst there is some discourse in the
profession as to how best to report on the income statement (profit and loss) effects
of CO2 trading, there has been no discourse as to how to value the underlying assets
that produce or use carbon allowances on the balance sheet.
82 J. Ratnatunga and K.R. Balachandran

Table 2 Issues in carbon strategic management accounting

SMA issue Carbon management impact
Business policy
Primary objective Sustainable value creation
Competitive advantage Carbon efficiency seen as a marketing mix variable in product
differentiation. An Efficient Carbon Management (ECM)
focus also taken in cost leadership strategies
Line-of-business ECM seen as a potential line-of-business
Competition and industry Adding a sixth force to Porter’s Five Forces Model – the impact
structures on the Industry of Carbon regulation (Porter 1980, 1983)
Gap analysis Strategies considered to close gap between current emission
levels and future emission targets
Environmental externalities Considered ‘internalities’ in product-market decision making
and HRM
Risk management Consideration of the impact on cash flows and reputation of the
company as a result of the carbon strategy positioning of the
company. Risk vs. Reward outcomes (e.g. cash flow at risk)
should be considered
Human resource management
Corporate culture A carbon lifestyle culture from grass roots level upwards. Low
carbon footprint activities encouraged. Excellence sought in
seeking continuous improvement in ECM
Empowerment Employees given resources and responsibility to participate in
ECM in lowering the organization’s carbon footprint
Marketing strategy
Products and markets Carbon impact considerations considered systematically in all
product-market strategies
Marketing research Undertaken to determine the needs of customers in terms of
participating in reducing carbon emissions and the
incremental price they are willing to pay for this (carbon
consciousness)
Market segmentation Separating customers geographically, demographically and
psychographically in terms of their carbon consciousness
Positioning strategy Consideration of taking an ‘active’ or ‘passive’ positioning in
terms of ECM as a source of competitive advantage
The product life cycle (P.L.C.) Consideration of the carbon footprint left by product
throughout its life cycle, especially in the decline and
obsolescence stages
Market penetration strategies Using carbon efficiency of existing products as an attribute to
sell more to existing carbon conscious customers
Market development strategies Using carbon efficiency of existing products as an attribute to
sell new carbon conscious customers in new segments
Product development strategies Incorporating carbon efficiency as an attribute in new product
designs to keep existing carbon conscious customers loyal
to the brand
Diversification strategies Leaving industries having products and markets seen as high
carbon emitting to new industries better long-term carbon
sustainable prospects (includes investments in JIs, and
CDMs under Kyoto)
(continued)
Carbon Emissions Management and the Financial Implications of Sustainability 83

Table 2 (continued)
SMA issue Carbon management impact
Experience curves Organizations with high experience in ECM products and
services should have lower costs.
Budgeting for marketing Budgets will incorporate ECM activities as potential revenues
activities and cost savings. Carbon trading activities could be
considered a separate line of business
Product marketing strategies
The product portfolio (BCG) Star products will have high market share and high market
matrix growth opportunities in industries with better long-term
carbon sustainable prospects
New product development Designing products and services to meet carbon emission
(NPD) targets and marketing them as such
Product abandonment Product Review Teams to consider carbon footprint in addition
approaches to profitability targets
Inflation The passing on of mandatory carbon costs and taxes as higher
prices to consumers will cause inflation
Packaging Consideration given to carbon footprint of packaging, in terms
of functionalism, convenience, recyclability and also image
After-sales service The carbon emission in terms of materials, labor and overhead
of undertaking work due to meeting warranties and other
after sales services should be costed into the product
Pricing strategy
Pricing analysis Carbon costs, carbon related competitor activity and the value
of low-carbon footprint products to carbon conscious
customers should be considered in such analyses
Elasticity of demand The impact on demand due to changes in prices if carbon costs
are incorporated.
Skimming Selling to high carbon conscious customers willing to pay a
price well above costs
Penetration Absorbing carbon costs of products and services sold to low
carbon conscious customers to develop brand awareness.
Productivity improvements can only be obtained either by
lowering costs via ECM or changing customer carbon
consciousness levels
International business strategy
Exporting vs. international Carbon costs can be reduced via Joint Implementation (JI) and
operations Clean Development Mechanism (CDM) investments as per
the Kyoto protocol
Price differentials and carbon Competing with countries that do not have carbon costs.
dumping Influencing government policy to impose countervailing
carbon taxes
Hedging policies Ensuring that carbon credits in the overseas country is not
devalued in terms of the parent country carbon credit
pricing
Promotional strategy
Promotional “Pull” strategy An Integrated Marketing Communication (IMC) approach
(via advertising etc.) should be taken to promote how the product or service is
reducing carbon footprint, e.g. via purchasing carbon offsets
(continued)
84 J. Ratnatunga and K.R. Balachandran

Table 2 (continued)
SMA issue Carbon management impact
Promotional “Push” strategy Sales Force budgets, targets and incentive schemes geared
(via sales force) towards extolling the attributes and pushing low carbon
impact products. Traveling times on sales calls minimized
to reduce carbon emissions. Bio-fuel cars used as sales
vehicles
Sales response functions Response of sales volume to carbon related promotions tracked
Media selection strategies Electronic media given higher priority to print media in order to
reduce paper usage
Supply chain strategies
Product-distance Carbon emission measurements in terms of Product-Distance.
The longer the distance and the more players in the channels
of distribution the higher is the carbon costs
The level of service The Service – Cost Trade-off required ensuring that the right
product gets to the right place at the right time, should
consider the carbon emissions required to provide this level
of service
Distribution cost accounting Computation of carbon related costs in order processing,
warehousing, transportation, credit control, and inventory
control
Transportation and simplex The use of these models to reduce transportation time and
models. resulting reduction in carbon emissions
Channel control Consideration of the motivation, relationships and conflict
issues that arise when channels are asked to on-sell products
and services using ECM approaches themselves
Channel adaptability Consideration of the adaptability of channels to changes in
product-market combinations as a result of reducing carbon
footprint
Distribution cost control Using ratio analysis to ensure that, in addition to economic
analysis, ECM in supply chain activities are also evaluated
Performance evaluation
Strategic financial structures Consideration if carbon related investments should be financed
(Gearing) via debt or equity. Ability to obtain shareholder and debt
holder funding at favorable rates due to the use of such
financing in ECM activities
Weighted average cost of capital If financing of carbon related investments can be isolated, then
(WACC) calculating an organization’s carbon related Cost of Equity
and Debt to calculate its overall Carbon-WACC. The equity
and debt market may value discount carbon intensive
businesses (causing high financing costs) and place a value-
premium on low carbon emitting businesses (causing low
financing costs)
Corporate performance ROI and residual income (EVA) used to evaluate not only
perspectives economic performance but ECM performance. If carbon
related revenues and costs can be isolated as a separate line
of business, this will enhance the evaluation
Strategic value analysis Calculation of value enhancement (or diminution) due to
strategies relating to carbon related investments and
operations
(continued)
Carbon Emissions Management and the Financial Implications of Sustainability 85

Table 2 (continued)
SMA issue Carbon management impact
Valuing strategic investments Valuation premium given to investments in ECM, such as
investments in alternative energy assets and abatement
activities. Examples are wind, biomass, solar, geothermal,
nuclear and clean coal
Valuing strategic operations These include operational adjustments to incumbent assets,
changes to energy prices, efficiencies in waste management,
purchasing and sale of carbon credits and carbon related
taxation
Free cash flows Net cash flows generated by carbon related activities less
investments in carbon related non-current and current assets
The business value The net present value of expected future cash flows generated
by strategic investments and operations in carbon related
business
The balanced scorecard Corporate report card to incorporate financial and non-financial
KPIs with carbon focus. This could in addition to, or
incorporated with the customer, innovation, internal
business processes and financial focus
Economic value added (EVA) A charge against revenue is made for the cost of investments in
carbon efficient assets. A separate Carbon-EVA can be
calculated if carbon related net-income, investments and
cost of capital can be isolated
Source: Ratnatunga and Balachandran (2009)

Therefore, it has been left to organizations outside the accounting profession to

develop carbon sequestration and emissions (CES) accounting measurements and
reporting frameworks. These have proliferated, with only few providing detailed
approaches and metrics, and all being incompatible with each other. This lack of
consistency has then resulted in almost no development in assurance standards,
from within or outside the accounting profession.
The cost and management accounting profession must also re-engineer itself to
be a ‘winner’ in this new economic paradigm. Business entities especially need to
consider issues such as trading in carbon allowances (or permits), investment in
low- CO2 emission technologies, counting the costs of carbon regularity compli-
ance, and passing on the increased cost of carbon regulation to consumers through
higher prices. Consumers need to consider if, given a choice, they are willing to pay
a higher price for CO2 neutral products and services so as to play their part in
reducing CO2 emissions.
These decisions and their consequences will impact the accounting profession
significantly, especially the business accounting areas of strategic cost management
and strategic management accounting. Information from the strategic cost and
management accounting systems will be particularly useful in this new economy,
termed carbonomics, that climate change and sustainability has forced upon
us. New costing techniques need to be considered to evaluate the ‘whole-of-life’
costs in terms of carbon emissions relating to products and services. Similarly, new
thinking will be required to provide strategic management accounting information
86 J. Ratnatunga and K.R. Balachandran

for business policy, HRM, marketing, new product development (NPD), promo-
tional, pricing, international business, supply chain management strategies and the
resultant evaluation of performance evaluation.
The inconvenient truth is that the accounting profession is hampered by a
conceptual framework that is ill equipped to meet the challenge of climate change
which requires a move from orthodox economic thinking to (ultimately)
Schumacherian ideals. This particularly so in financial accounting, but also pertains
to current approaches to cost and management accounting that focus on current
costs and short-term decision making. As a result, it is most likely that the paradigm
shift required to capture the totality of the financial implications of the
sustainability agenda will be from outside the accounting profession.

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Sustainability and Business at a Crossroads:
The Idea of Positive Investments in Creating
Shared Value

Mariela M. Vargova

Mariela Vargova, Ph.D., is a Senior Sustainability Analyst with the Sustainability

and Impact Investing Group at Rockefeller & Co. She conducts environmental,
social and governance analysis of public equities for investment consideration
and is responsible for the corporate engagement strategies and dialogues. Prior
to joining Rockefeller & Co., Mariela had an extensive academic experience in
the social sciences, and before that she worked in Eastern Europe on a non-
governmental project for the Open Society Institute. Currently, Mariela sits on
the Steering Committees of the Sustainable Investment Research Analyst Network
(SIRAN) and the International Working Group (IWG) affiliated with the US SIF:
The Forum for Sustainable and Responsible Investment. She is a member of the
New York Society of Security Analysts (NYSSA) and the International Corporate
Governance Network (ICGN). Mariela holds an M.A. in Political Science from
Sofia University, Bulgaria, and an M.A. and a Ph.D. in Political Science from the
New School for Social Research, New York.

1 Introduction

In this chapter, I discuss two distinct and innovative economic theories that
re-define what sustainability and, more specifically, what business sustainability
is and should be. I elaborate on the normative dimensions of the concept of
sustainability as developed by Professors Joseph E. Stiglitz, Amartya Sen and
Jean-Paul Fitoussi, on the one hand, and examine the principle of Creating Shared

The views expressed are those of the author and not necessarily those of Rockefeller & Co. or its
affiliates.
M.M. Vargova (*)
Sustainability and Impact Investments, Rockefeller & Co, 10 Rockefeller Plaza,
New York, NY 10020, USA
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 89
DOI 10.1007/978-3-642-37018-2_4, © Springer-Verlag Berlin Heidelberg 2013
90 M.M. Vargova

Value as offered by Professor Michael E. Porter and Mark Kramer, on the other
(Stiglitz et al. 2009; Porter and Kramer 2011).
At a time of increased calls in society for the need to reconsider the foundations
of the existing market system in search of new and more sustainable forms of
capitalism, these two theories of sustainability carry a powerful transformative
potential. They innately integrate society’s economic and social prosperity with
the notion of long-term “positive investments” made today to ensure economic,
social and environmental durability tomorrow. Moreover, they offer roadmaps for
two distinct and innovative post-redistributive ways of thinking and assessing
sustainability for its economic, societal and environmental value.
I first elaborate on Stiglitz et al.’s normative argument for sustainability that
considers it an intergenerational, forward-looking activity that ensures transferabil-
ity of sustainable assets or “stocks” – economic, social and environmental – from
us to future generations. At a macroeconomic level, this approach looks at
sustainability as a set of positive investments and wealth creation today, both in
qualitative and quantitative terms that could define the well-being of future
generations.
I then focus on Porter and Kramer’s principle of Creating Shared Value that also
builds on the notion of sustainability as a new way of achieving economic growth
and societal value. I show how Porter and Kramer reconnect economic value with
social progress, while challenging the business status quo and requiring major
transformation in the way companies model and implement their business strategies
and value chains.
Thus, at a microeconomic level, their idea of Creating Shared Value serves as a
source of a company’s competitive advantage, and it clearly announces a novel
agenda for organizing business, creating strategy, and thinking of social progress
and economic prosperity. Broadly speaking, the principle of Creating Shared Value
is focused on finding new sustainable forms of economic and social value through
local business environments called clusters.
In my view, these two distinct economic theories are complementary in their
efforts to redefine the concept of sustainability, addressing respectively its macro-
economic and microeconomic dimensions. Critical of the excesses of globalization,
both theories allude to an innovative and what I call a post-redistribution approach
that emphasizes the role of localized or contextual forms of long-term investing
strategies to drive economic and social growth. This approach leads also to a call for
collective action in open and transparent markets for all stakeholders – businesses,
suppliers, governments, NGOs, citizens and communities. It democratizes business
by opening the channels of participation in economic society and social decision-
making to diverse members of a global society, including those who have been
traditionally underserved, unprivileged and under-represented. Finally, it
encourages localized and contextualized forms of long-term investment public-
private partnerships that can help alleviate poverty, reduce inequality and prevent
ecological degradation, thus ensuring sustainability to future generations.
Sustainability and Business at a Crossroads: The Idea of Positive. . . 91

2 Redefining Sustainability: Positive Investments now

to Ensure Durability in the Future

Before turning to a more detailed analysis of Porter and Kramer’s understanding of

Creating Shared Value and how it affects the business model of a corporation, I
want to focus on the broader intellectual context underpinned by another recent
influential academic and public policy work on sustainability. In what follows, I
will discuss Stiglitz et al.’s approach to sustainability as a transfer of “all stocks of
resources” from the present to the future. This approach presents a paradigmatic
shift in the way we think today of sustainability and sustainable development in
general. Moreover, it makes a valuable economic and normative contribution to the
sustainability discourse at a macroeconomic level. It argues for creating a new
intergenerational, forward-looking shared value understood as economic, environ-
mental and social assets and resources, a set of “positive investments” made today
that would allow us to define and maintain the durability of people’s future
economic, social and ecological well-being.

2.1 Sustainability as Taking Stock in the Future

In their report commissioned on behalf of French President Nicholas Sarkozy on

the measurement of economic performance and social progress, Stiglitz et al.
undertake an important step forward in reformulating the question of sustainability.
The authors build on the Brundtland Commission’s earlier definition of sustainable
development as an intergenerational, forward-looking exchange that is framed by
the capacity to meet “the needs of the present without compromising the ability of
future generations to meet their own needs” (UN Resolution 1987). Yet Stiglitz et al.
focus their analysis on what they consider to be a key, and in their own words, often
overlooked aspect of the Brundtland’s concept of sustainability, namely the idea of
sustainability as distribution of resources within as well as between generations.
According to their thesis, sustainability should be seen as a capacity of present
generations to pass to future generations the “stocks” of all accumulated resources.
The authors use the terms “stocks” interchangeably with “wealth” or “capital”
resources. For them, sustainability should be separated from simply measuring
the well-being of present generations; it should be perceived as a process of
assessing and predicting the future. It is a process of transferring to the future
sufficient amounts of all available assets and resources that will matter to people’s
well-being and quality of life. By stressing the idea of resource accumulation today
and its transfer from the present to the future, Stiglitz et al. enrich the existing
understanding of sustainability. Their approach is comprehensive; the list of stocks
of resources encompasses all natural, physical, human and social capital.
This list of stocks is not only all-inclusive; it is open-ended to future input. For
example, in addition to the transfer of the “stock of exhaustible resources,”
sustainability accounts for assets that are defined by the way we “maintain the
quantity and quality of all the other renewable natural resources that are necessary
92 M.M. Vargova

for life” (Stiglitz et al. 2009). This approach raises the questions of “how much
physical capital – machines and buildings – we pass on, and how much we devote to
the constitution of the human capital of future generations, essentially through
expenditure on education and research” (Stiglitz et al. 2009).
Finally, it reflects the quality of societal institutions that current generations
build today to ensure the good quality of life tomorrow. Such understanding of
sustainability envisions all these stocks of resources as in process, highlighting both
their evolution and unpredictability in future periods. At the same time, it aims to
ensure a qualitatively positive transformation to the future, one that is built on the
conditions of economic, social and ecological well-being.
For Stiglitz et al. sustainability is a question of preserving or increasing all of
these “capitals” or “stocks” today, so that we can ensure their future durability. The
authors stress the need for an increase in both the quantities and qualities of natural
resources, of human, social and physical capital. These are all existing stocks of
quantitative and qualitative resources, the authors write, “that underpin human
well-being” (Stiglitz et al. 2009). Assessments of sustainability, the authors write,
“must be made on complete inventories of these stocks, and a good assessment of
how they are currently changing, and of what are their expected paths of evolution”
(Stiglitz et al. 2009).
This intergenerational, forward-looking approach to sustainability is confronted
by what the authors refer to as challenges or “main stumbling blocks” based on the
inability today to predict and identify the dimensions of sustainability tomorrow. For
instance, it is almost impossible to evaluate sustainability economically in money
units because, as the authors assert, today “market prices are nonexistent for quite a
large number of the assets that matter for future well-being” (Stiglitz et al. 2009).
Even when they are available, the authors continue, there is no guarantee that they
will adequately reflect how these different assets will matter for future well-being
due to “market imperfections, myopia and uncertainty” (Stiglitz et al. 2009).
At the same time, it is impossible to firmly know the themes of sustainability
tomorrow. Predicting future interactions between the economy and the environment
is difficult, and uncertainty dominates normative discourse. For example, the authors
stress, it could be argued that our descendants may become highly sensitive to the
relative scarcity of some environmental goods to which we pay little attention today
because they are still relatively abundant, and this requires we immediately place a
high value on these items just because we think that our descendants may wish to do
so (Stiglitz et al. 2009). These two challenges – monetary risk and normative
uncertainty about issues of sustainability – invite us to think of a new approach to
defining and evaluating sustainability, both in quantitative and qualitative terms.

2.2 The Idea of Positive Investments

With their work on assessing sustainability, Stiglitz et al. make an important

argument for positive investments as a plausible way to think of and evaluate
sustainability in an intergenerational, forward-looking manner, as opposed to
negative investments or the so-called “non-sustainability” (Stiglitz et al. 2010).
Sustainability and Business at a Crossroads: The Idea of Positive. . . 93

This series of positive investments sums up the idea of transferring “wealth,”

“stocks” or “capital” in the future in both quantitative and qualitative ways,
ensuring economic and socio-environmental prosperity. The well-being of future
generations compared to ours, the authors argue, will depend on what resources we
pass on to them and on whether we leave enough of these resources (Stiglitz et al.
2009). The sustainable future thus depends on both the good quality of resources we
pass on to future generations and the quantitative sufficiency of those resources.
The approach of positive investments captures the upward change of rate with
which all of these global resources – natural, physical, human and social stocks –
are evolving. At a global, macroeconomic level, positive investments would ensure
that countries do not “over-consume their economic wealth” and that they support a
sufficient rate of accumulation or renewal of “produced capital, be it human or
physical” (Stiglitz et al. 2009). In this sense, sustainability in forms of positive
investments is contrasted by instances of non-sustainability such as low savings,
low investment in education, and insufficient reinvestment of income generated by
extraction of fossil fuels for countries that strongly rely on this source of income
(Stiglitz et al. 2009).
The idea of positive investments requires more than balancing off or, in other words,
correcting the negative societal and ecological impacts caused by depletion of natural
resources or environmental catastrophes. For example, after an ecological disaster,
when governments and businesses try to help restore the level of the initial environ-
mental stock, they may invest in new eco-friendly technologies to rebuild the natural
habitat to its pre-crisis level, and thus increase economic activity and prosperity.
Yet the idea of positive investments goes beyond these corrective efforts.
Sustainability is more than overcoming the deficits of overconsumption of or
underinvestment in resources today. If sustainability is thought of as a series of
positive investments in terms of an increase in economic activity and financial
prosperity, it should also be perceived as a means of improving and enhancing the
quality of life in social and environmental terms. Through investments in techno-
logical innovations and changes, current generations could restore environmental
degradation and create opportunities for preventing future pollution by investing in
eco-friendly business solutions and lifestyles. Similarly, through a series of positive
investments, current generations not only can help alleviate poverty and overcome
economic inequality today; they can bring forth social and economic prosperity to
the future.1

1
The idea of sustainability as positive investments is implied in other literature on sustainable
forms of capitalism. For example, some authors consider positive investments as the ability of the
market system to “engage and deliver positive results for an ever-growing number of the world’s
citizens.” This notion refers to the ability to better manage capitalism’s damaging environmental
and other impacts, while amplifying and disseminating the benefits of capitalism more widely
(Bower et al. 2011). According to others, positive investments should serve as a means to stop
diminishing economic prosperity that is thought to be a result of an oversupply of destructive
products like “bad” loans (i.e. over creation of “bads”) and undersupply of “good” products
(i.e. under creation of “goods”) – products that have authentic benefits like health foods. Sustain-
able capitalism requires reversing this imbalance by increasing investments in global public
“goods” and mitigating the risk of global public “bads” (Haque 2011).
94 M.M. Vargova

2.3 “Accounting” for Sustainability

Stiglitz et al. propose an innovative theoretical framework to assess for

sustainability by tracking the rate of change in resource investments in an intergen-
erational way. What they offer is a means of assessing the path on which
sustainability assets will flow and evolve over time through accounting instruments.
For example, they propose large-scale projection models that show how future
changes in all stocks or capital – natural, physical, human and social capital – will
affect well-being, and how increases in these stocks today are likely to improve or
help maintain future well-being (Stiglitz et al. 2010). A sustainable future is seen
prospectively as “an opportunity set that is at least as large as what is currently
available to living generations” (Stiglitz et al. 2010).
In addition, the authors call for “a priori definition of how this path translates in
terms of well-being at all future dates,” that is, a discounted sum of well-being over
future periods (Stiglitz et al. 2010). This approach of “discounting” future well-
being or future “opportunity set” – of economic, environmental and social stocks –
is innovative and different from other macroeconomic redistribution approaches,
especially those that measure sustainable development as a transfer of wealth and
resources from developed to developing countries to combat economic inequality
or environmental degradation.
Instead, by discounting future projections of well-being or future “opportunity
sets,” the authors argue, we may be able to anticipate future declines or increases in
well-being below or above current levels. We can capture in advance countries that
are on unsustainable paths because of insufficient rate of accumulation or of
renewal of their produced capital – human or physical.
For example, a non-sustainable future in a case of forecasted environmental
degradation of a natural resource will be reflected in increases in the relative
accounting or “imputed” prices of those environmental stocks today – a strong
forewarning of future non-sustainability (Stiglitz et al. 2010). One can argue that
this approach will also equip us with knowledge of emerging areas of resource
overconsumption or underinvestment, therefore increasing our capabilities for
action through positive investments.
Finally, the idea of accounting for sustainability can be viewed as a powerful
metaphor for our responsibility – we of present generations – to envision and think
about the future in a responsible and accountable way. It puts the emphasis on our
current efforts to project and envision future well-being, to track the rate of change
needed to achieving that well-being, and to ensure that we make positive investments.

3 Porter and Kramer’s Post-redistribution Approach

to Creating Shared Value

We saw with Stiglitz et al. that making positive investments aims to ensure
sustainability and value creation transferrable to the future. Sustainability is seen
as an intergenerational, forward-looking project that captures the accumulation and
Sustainability and Business at a Crossroads: The Idea of Positive. . . 95

transfer of wealth from today to tomorrow. The project is a global, macroeconomic

agenda of rethinking sustainability in conditions of economic risk as well as social
and environmental unpredictability.
Porter and Kramer’s model, on the other hand, focuses on the question of how to
perceive of such sustainability at a microeconomic firm level. In what follows, I
discuss their concept of Creating Shared Value as an instance of positive
investments in the specific contextualized business localities known as clusters.
Like the model of Stiglitz et al., the principle of Creating Shared Value argues for
positive investments that can lead to economic and social growth – a joint value
creating agenda that can improve the quality of people’s lives, alleviate poverty and
bring forth ecological justice in local communities. Moreover, such positive
investments enhance a company’s competitive advantage.

3.1 The Integration Argument

Porter and Kramer cast the idea of Creating Shared Value as a critique of the
corporate social responsibility (CSR) approach in management and corporate mind-
set that thinks of societal issues as peripheral to the concerns of business. Corporate
social responsibility, they argue, presents too narrow a vision of a company’s social
responsibility – the fact that businesses “have overlooked opportunities to meet
fundamental societal needs and misunderstood how societal harms and weaknesses
affect value chains” (Porter and Kramer 2011). Considered as an “externality” that
aims merely at “doing good” by focusing solely on citizenship, philanthropy, or
corporate sustainability, the CSR approach is also held to be separate from profit
maximization, with an agenda determined by “external reporting” and its impact
limited by corporate footprint and CSR budget.
In contrast, Porter and Kramer argue that the approach of Creating Shared Value
should be considered as broader than corporate sustainability and as integral to
firms’ competitive advantage and profit maximization because of the way
businesses create economic and societal benefits relative to cost. At its core, this
approach is about sustainability as value creation for both the company and the
society in which it operates.
To be sure, Porter and Kramer’s integration argument is not an isolated effort.
There have been other recent attempts to integrate a sustainability mindset with
business strategy. For example, the “responsible business” perspective has been
critical of corporate responsibility programs described as “often slower and less
effective than transformations grown from the businesses outward,” and its
supporters find such programs to be generic and separated from running the
business (Sanford 2011). Their argument is that “working from the level of a
business to achieve responsibility overcomes this fragmentation by generating
customized responses to actual challenges” (Sanford 2011). Similarly, the
proponents of the “sustainable business” perspective also argue for the integration
of environmental, social and ethical issues into a company’s business model and
96 M.M. Vargova

strategy, claiming that such integration can serve as an indicator of management

quality and of a well-run corporation (Cramer and Karabell 2010).
In this regard, sustainable business means whether a company “delivers value for
investors, customers, and employees, improves the living standards of its
employees and the communities it touches; makes wise use of natural resources;
and treats people fairly” (Cramer and Karabell 2010). Finally, the “value creation”
perspective further insists on the need to integrate “sustainability into strategic-
planning” as a means to “identify new growth opportunities while reducing
[companies’] exposure to legal, resource, and socio-political risk” (Lowitt 2011).
The proponents of this approach defend the integration of sustainability and
business strategy as a means toward greater efficacy and long-term business
viability.
What is distinct and innovative about Porter and Kramer’s principle of Creating
Shared Value, however, is their proposition about radically transforming business
strategies and practices by moving toward localized forms of value chain – the way
companies interact with local suppliers, customers and communities. The principle
of Creating Shared Value calls for a broader redefinition of value creation as
business policies and operating practices. It enhances the competitiveness of a
company while simultaneously advancing the economic and social conditions in
the communities in which it operates. The concept refers to the need for new
management strategies that a company could employ in addressing environmental,
social and governance issues that traditionally have been considered business
externalities or non-financial. This is an integration of business strategy with social
needs awareness in recognition that today “societal needs, not just conventional
economic needs, define markets” (Porter and Kramer 2011).

3.2 Transforming Business Via Local Clusters

While Stiglitz et al. discuss sustainability as an inter-generational project with

temporal dimensions that connect the investments in the present with the future
of next generations, Porter and Kramer’s approach integrates sustainability and
business at a microeconomic level looking for local or community business
solutions in the social and economic context of a company’s operations and
business activities. In so doing, the authors call for a “new locational thinking”
about business strategy and management. This new type of thinking has significant
impact on transforming business internally – at the level of strategy – but also
externally by critically rethinking the conventional forms of vertical integration of
value chain and its effects on economic and social value creation.
In defining the principle of Creating Shared Value, Porter and Kramer outline the
role of products and innovation in achieving economic and social growth, placing
an emphasis on the role of local clusters as the natural foundation of such growth.
This is a paradigmatically novel way of integrating sustainability and business
strategy within the prisms of a company’s local economic, environmental and
Sustainability and Business at a Crossroads: The Idea of Positive. . . 97

social activities. In his earlier elaboration on clusters, Porter defines them as “a kind
of new spacial organizational form in between arm’s-length markets on the one
hand and hierarchies, or vertical integration, on the other” (Porter 1998). Porter
contrasts them to the conventional and more rigid, in his view, forms of vertical
integration of value chain.
Once considered a source of competitive advantage, vertical integration refers to
value chain activities of a company that connect all functions of design, production,
selling, delivery and support of products, including both upstream (suppliers) and
downstream (consumers) aspects of the business (Magretta 2011). Porter
characterizes clusters as an alternative and more “robust” way of organizing the
value chain that is more efficient, effective and flexible in comparison to vertical
integration.
Clusters encompass, for example, suppliers of specialized inputs and providers
of specialized infrastructure, local customers, and governmental and other
institutions such as universities, standards-setting agencies, think tanks, vocational
training providers and trade associations (Porter 1998). They are organizational
business forms that offer opportunities for sophisticated competition between firms
and for engaging all stakeholders.
This approach highlights a new locational way of thinking about Creating
Shared Value that represents an innovative transformation of business strategy. It
is a new way of doing business that interacts more dynamically and in an integrated
fashion with local suppliers, customers and communities of operations. This per-
spective requires building strong local capabilities for economic profitability along
with producing positive social and ecological impact. Moreover, clusters, in Porter
and Kramer’s view, will give a company a major competitive advantage. They
provide a better quality of local business environment, higher quality transportation
infrastructure, more availability of well-educated employees, and a more efficient
and fair legal system to resolve disputes between companies at a local level (Porter
1998).

3.3 Post-redistribution Approach

At a time when the challenges and needs facing society are ever increasing,
customers, employees and communities are asking business to step up and do
more (Porter and Kramer 2011). The societal urgency produced by the pressures
of growing economic inequality and environmental degradation gives rise to new
questions about the purpose and role of the corporation in society. The concept of
Creating Shared Value can be seen as a new type of corporate behavior involving a
series of business investments with positive economic and social impact. Indeed, as
Porter and Kramer stress in their work, the principle of Creating Shared Value is not
just about economic profit, or about personal values. Nor is it about “sharing”
values in the form of revenues already created by firms, the so-called “redistribu-
tion” approach (Porter and Kramer 2011). Instead, Creating Shared Value
98 M.M. Vargova

represents what one can call a new post-redistribution approach to achieving

positive economic and social impact. Let me explain.
As Porter reiterates in his work, the idea of a strategy implies uniqueness – in this
case, the development of products and services that make a company distinct. A
successful strategy also entails a longer time horizon because “building out a unique
position in the market takes a series of investments over time” (Magretta 2011). By
implementing the principle of Creating Shared Value, business can expand the
overall amount of value creation. Companies do that through “shared value
investments” in the local clusters that include, for example, new procurement
practices and supporting clusters of suppliers, among others. This form of shared
value investments increases the competitiveness of a company and the health of the
community around it. According to the authors, providing jobs and wealth creation
for communities and their citizens is a form of “appropriate investments” that can
have a “profound effect . . . on productivity and innovation” (Porter and Kramer
2011). In the end, the return will be greater economic value and broader strategic
benefits for all participants (Porter and Kramer 2011).
Seen in this way, the principle of Creating Shared Value encourages businesses
to engage in long-term investments in communities of operations that expand “the
total pool of economic and social value” (Porter and Kramer 2011). For example,
Porter and Kramer point to the implementation of Creating Shared Value principle
in building new procurement business practices with local suppliers. “By increasing
access to inputs, sharing technology, and providing financing, companies can
improve supplier quality and productivity while ensuring access to growing
income” (Porter and Kramer 2011). This form of business investment moves
beyond an orthodox understanding of corporate contribution to society based on
either corporate philanthropy or revenue redistribution.
Instead, it encourages forms of investments in the clusters of a company’s
operations to stimulate productivity and innovation. This new business strategy
requires investing in building local supplier capabilities both in the developed and
developing world and working intensively with suppliers by providing them with
advice on production practices, guaranteeing their bank loans, and helping secure
essential inputs for their plants. A shared value perspective might focus, for
example, on investments that improve supplier-farmers’ growing techniques or
strengthen the local cluster of supporting suppliers and other institutions in order
to increase efficiency, yields, product quality, and sustainability, in general (Porter
and Kramer 2011).
We see that the normative virtue of the principle of Creating Shared Value lies in
the linking of economic and social progress with a changing business strategy and
value chain toward more localized business and social solutions. Porter and Kramer
see in this principle a powerful transformative potential that through a series of
initial long-term positive investments can achieve economic and societal prosper-
ity. As capitalism begins to take hold in poorer communities, Porter and Kramer
assert, “new opportunities for economic development and social progress increase
exponentially” (Porter and Kramer 2011).
Sustainability and Business at a Crossroads: The Idea of Positive. . . 99

The Creating Shared Value approach not only drives competitive advantage; it
can help solve important economic, societal and ecological issues such as
alleviating unemployment and poverty, improving education and providing access
to participation in the formation of new local businesses. Through their innovative
eco-friendly products and services and innovative environmental management
programs, companies can address environmental degradation and pollution at
local levels, helping to facilitate the transition to an environmentally sustainable
economy.

3.4 Clusters Versus Globalization?

Porter and Kramer’s idea of clusters and their argument for investing in new local
business forms can be seen as a critique of excessive forms of globalization.
Outsourcing to other locations and countries, the authors insist, creates transaction
costs and inefficiencies that offset lower wage and input costs (Porter and Kramer
2011). Moreover, global business strategies that rely on outsourcing and cheap
labor markets create impediments to productivity and innovation, and the creation
of shared value. For decades, competition has been driven by input costs wherein
multinationals will choose those locations that have some important endowment
(e.g. natural harbor or a supply of cheap labor), thus enjoying a comparative
advantage. Today, however, Porter remarks, “competitive advantage rests on
making more productive use of inputs, which requires continual innovation . . .
[and] clusters reveal that the immediate business environment outside [of]
companies plays a vital role as well” (Porter 1998).
As a new locational trend of thinking about sustainability and business, the
principle of Creating Shared Value is not anti-globalization per se. What it calls for
is a contextualization of business strategy with positive economic and social
impacts in a company’s global operations. It is a globally applicable principle
that encourages economic and social growth in the localities and regional
operations of a multinational company in both developed and developing countries.
Multinational companies are encouraged to transform their business strategies and
practices by creating local clusters of prosperity in the various locations of their
operations by investing and building capabilities for working with local customers
and suppliers in various business and geographic contexts.
Through positive investments in localized business formations, multinational
companies have the potential to contribute to the economic and social growth and
prosperity in their global operations. They can improve the quality of people’s lives
and protect the natural environment in different communities, thereby enhancing
the uniqueness of their strategy and competitive advantage. They also can explore
innovative strategies for engaging with business partners, suppliers and customers
while involving other societal stakeholders in the process of pursuing economic and
social shared value.
100 M.M. Vargova

4 Participation in Open and Transparent Markets

The concept of Creating Shared Value can be broadened to serve as a foundation for
democratizing business by mobilizing and including in the collective action all
stakeholders – businesses, suppliers, customers, governments, NGOs, investors and
citizens in communities of operations. This collective action requires novel forms
of business cooperation based on coordination and trust that foster new forms of
local engagements. It also demands opening the channels and access to participa-
tion in economic and social interactions to all members of the community and
society to create economic and social value. The principle of Creating Shared Value
thus helps redefine the rules of the process of engagement and participation in
economic and social activities as well as in decision-making.
As Porter insists, “the enduring competitive advantage in a global economy lies
increasingly in local things – knowledge, relationships, motivation” (Porter 1998).
Clusters provide better access to resources and information, and the “mere
co-location of companies, suppliers, and institutions creates the potential for
economic value” (Porter 1998). More importantly, clusters have the potential to
form “open and transparent markets” that provide conditions for both economic and
social growth in that they secure reliable suppliers and give them incentives for
quality and efficiency while also substantially improving the incomes and purchas-
ing power of local citizens (Porter and Kramer 2011).
The idea of open and transparent markets blurs the distinction between the for-
profit and nonprofit world, between private and public types of investments in
Creating Shared Value. It bridges the traditional divide between the responsibilities
of business and those of government and civil society. From a society’s perspective,
Porter and Kramer argue, “it does not matter what types of organizations created the
value. What matters is that benefits are delivered by those organizations . . . that are
best positioned to achieve the most impact for the least cost” (Porter and Kramer
2011).
Local clusters open access to and encourage participation in the global economy
for all members of society. They include new types of NGOs that “understand the
importance of productivity and value creation. . . [and] have often had a remarkable
impact” on society, as well as governments and public institutions that, through
their programs such as public spending for specialized infrastructure or educational
programs, can enhance a company’s productivity (Porter 1998).
Finally, investments by companies in training programs, infrastructure, quality
centers and testing laboratories also contribute to increased productivity (Porter
1998). All investments at the cluster level are examples of a post-redistribution
approach to creating economic and social growth, and they have the potential for
collective benefits – the creation of common shared value.
Because of their inclusive nature, open and transparent markets are global and
interconnected with empowering societal potential. They reflect the notion of
“participatory parity,” a political concept of justice developed by the political
philosopher and theorist Nancy Fraser. For Fraser, the idea of participatory parity
emphasizes the dismantling of all “institutionalized obstacles that prevent some
Sustainability and Business at a Crossroads: The Idea of Positive. . . 101

people from participating on a par with others, as full partners in social interaction”
(Fraser 2009). When applied to Creating Shared Value, the idea of participatory
parity appeals to opening all channels of information and providing access to all
members of the community to important resources in the economic and social
interactions of the local business environment. It is an inclusive project of partici-
pation and engagement of all businesses, suppliers and local stakeholders in a
community’s economic and social well-being.
Such approach to open and transparent markets is also in tune with another
progressive concept of “democratization of commerce” developed by C. K. Prahalad,
a thinker of the Bottom of the Pyramid market approach to alleviation of poverty
and ecological justice in underserved communities. For Prahalad, democratization
of commerce means providing to every person access to the benefits of the global
economy.
Democratization of commerce, C.K. Prahalad writes, is based on all people
having the right to exercise their role as consumers, producers, entrepreneurs,
investors and innovators (Prahalad 2010). This democratizing or participatory
idea about inclusion and access calls for providing access to information, access
to credit and micro financing, and access to regional and national markets. It also
requires a new form of active and collaborative engagement of the private sector
with civil society, governments and philanthropists.
Like the Creating Shared Value approach, the democratization of commerce is
an effort to respond to the global–local tension in business, namely the need of
multinational companies to bring “world-class products and global standards of
quality and safety to . . . [underserved] markets,” while making the solutions
“locally responsive” (Prahalad 2010). Large private-sector firms, C. K. Prahalad
writes, have to rapidly learn about local customers, their needs and aspirations.
They have to start co-creating business solutions, gaining local knowledge,
accessing specialized skills, reducing capital intensity and overhead, gaining
trust, and becoming locally relevant (Prahalad 2010).
In closing, we can see how these approaches of sustainability for creating
prosperity in open and transparent markets complement Stiglitz et al.’s meta-
argument, discussed earlier, that emphasizes the active participation and engage-
ment of current generations in providing the path toward a sustainable future.
Through positive investments today and by engaging all stakeholders, we can
identify new ways of pursuing and assessing sustainable wealth of our economic,
social and environmental capital tomorrow.
In presenting these theories, I have tried to compare two complementary views
about what sustainability is, how the concept is related to the economy and to
business, and to show the role of positive investments in helping to ensure a
sustainable future. We saw how these models stress the need to change conven-
tional ways of thinking of and assessing sustainability by proposing radical new
forms of post-redistribution of all resources. At a macroeconomic level, we think of
it as an intergenerational series of positive investments that seek to ensure the
transfer of all stocks of capital – natural, physical, human and social – from today to
tomorrow.
102 M.M. Vargova

And at a microeconomic level, we think of it as a new locational type of strategy

and business practice that integrates a company’s agenda for economic, social and
environmental progress with the involvement of all stakeholders, as in the principle
of Creating Shared Value.
Taken together, these approaches re-envision the way we can think of sustain-
able development, connecting all participants – national governments, local
communities, investors, citizens, and businesses – in novel and urgent forms of
participatory action. They all stress the need for positive investments made today in
a forward-looking and cross-sectional way to create shared value for all tomorrow.
They serve as a meaningful roadmap to pursuing economic prosperity, societal
growth and ecological well-being.

References

Bower JL, Leonard HB, Paine LS (2011) Capitalism at risk: rethinking the role of business.
Harvard Business Review Press, Boston
Cramer A, Karabell Z (2010) Sustainable excellence. The future of business in a fast-changing
world. Rodale, Emmaus
Fraser N (2009) Scales of justice. Reimagining political space in a globalizing world. Columbia
University Press, New York
Haque U (2011) The new capitalist manifesto. Building a disruptively better business. Harvard
Business Review Press, Boston
Lowitt E (2011) The future of value. How sustainability creates value through competitive
differentiation. Jossey-Bass, San Francisco, A Wiley Imprint
Magretta J (2011) Understanding Michael Porter. The essential guide to competition and strategy.
Harvard Business Review Press, Boston
Porter ME (1998) Clusters and the new economics of competition. Harvard Bus Rev. Nov–Dec
1998. HBR Reprint 98609. http://hbr.org/
Porter ME, Kramer M (2011) Creating shared value. How to reinvent capitalism – and unleash a
wave of innovation and growth. Harvard Bus Rev. Jan–Feb 2011. HBR Reprint R1101c. http://
hbr.org/
Prahalad CK (2010) The fortune at the bottom of the pyramid. Eradicating poverty through profits.
Wharton School Publishing, Upper Saddle River
Sanford C (2011) The responsible business. Reimagining sustainability and success. Jossey-Bass,
San Francisco, A Wiley Imprint
Stiglitz J, Sen A, Fitoussi J-P (2009) Report by the commission on the measurement of economic
performance and social progress. Commission on the measurement of economic performance
and social progress. http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf
Stiglitz J, Sen A, Fitoussi J-P (2010) Mismeasuring our lives. Why GDO doesn’t add up. The New
Press, New York/London
United Nations Resolution adopted by the General Assembly 42/187 (1987) Report of the world
commission on environment and development. UN Documents Gathering a body of global
agreements. http://www.un-documents.net/a42r187.htm
Integrating Sustainability in Capital
Budgeting Decisions

Marinilka Barros Kimbro

1 Background

There is a growing emphasis, social awareness and an implicit expectation that

firms need to behave in a more socially responsible and sustainable manner. Global
warming, climate change, escalating energy costs and environmental degradation
issues have increased public scrutiny regarding the role of firms as actors and agents
in part responsible for these problems. Firms are responding to these pressures and
they are managing them by attempting to identify all social, environmental and
economic impacts in order to control, assess, prevent and eventually correct failures
from actions that potentially have an adverse effect on human, animal or plant life.
Corporate commitment to sustainability is increasingly evidenced by firms’ partic-
ipation in voluntary risk assessment and reporting initiatives such as: the UN’s
Global Compact (GC), the FTSE4 Good Indices, the Global Reporting Initiative
(GRI), the Dow Jones Sustainability Indexes (DJSI) or through the compliance to
International Standards Organization certifications (ISO 14001 and ISO 26000).
Traditionally, environmental costs and benefits have generally been identified in
product and process design, in operations and plant location selection. However,
there is evidence that the majority of firms do not consider environmental impacts
in capital budgeting decision making and analysis (Vesty 2011). There are also
concerns that conventionally accepted analytic methodologies – like Net Present
Value (NPV), Discounted Cash Flow (DCF) or Internal Rate of Return (IRR) – do
not favor sustainability related investments (Hopwood 2009). Commonly used
capital budgeting techniques are constructed in ways that indeed can create bias
against the selection of sustainable alternatives in capital selection. For example,
certain benefits related to sustainable projects might require larger investments that

M.B. Kimbro (*)

Accounting Department, Albers School of Business and Economics, Seattle University,
901 12th Avenue, Seattle, WA 98122, USA
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 103
DOI 10.1007/978-3-642-37018-2_5, © Springer-Verlag Berlin Heidelberg 2013
104 M.B. Kimbro

require longer paybacks in order to develop positive cash flows. Also, positive
qualitative factors of sustainable alternatives might be hard to quantify and the risk
related nature of less-sustainable alternative investments might be difficult to
incorporate in the cost of capital. Additionally, one might argue, that discounting
NPV techniques assume –incorrectly- that the benefit of future biodiversity preser-
vation and “natural capital” conservation will decrease in future years. In other
words, it will be incorrect to assume that the future benefits of a sustainable
investment will be less valuable than the present benefits of conservation as the
application of the discounting techniques imply. The Economic and Biodiversity
Report of 2008 notes: “that a 4 % discount rate means that we value a natural
service to our grandchildren (50 years hence) at one-seventh the utility we derive
from it (today), a difficult standpoint to defend” (TEEB 2008). Furthermore, there
are many hidden costs that are “buried” in overhead or in general expenses that is
not captured in current capital budgeting analysis. Managers could select equip-
ment without understanding and evaluating the Full Cost or Life-Cycle impacts that
capital assets might have. For example, firms might acquire equipment that requires
to be cleaned with a hazardous substance, or uses a refrigerant that affects the ozone
layer, or is cooled with fluids which become contaminated during the production
process, or is lubricated with hazardous lubricants that require workers to use
protective equipment that must be removed and disposed of in a special manner.
Without a good understanding of all the hidden costs associated with the acquisition
of capital assets, firms cannot effectively make capital budgeting decisions.
In this Chapter, I will discuss how to integrate sustainability issues into capital
budgeting decisions by attempting to articulate a practical approach for capital
budgeting that incorporates sustainability and environmental analysis into decision
making by evaluating eco-efficiency (EE) analysis through how Life-Cycle-Assess-
ment (LCA), life-cycle costing (LCC) and Full-Cost Accounting (FCA) techniques.
Also, I will discuss how to incorporate the risks associated with environmentally
risky capital projects into the discount rate of the cost of capital.

2 Firm Commitment to Sustainability

Firms typically go through three levels, stages, approaches, or “mindsets” regarding

how they integrate sustainability issues into their decision making processes:
compliance, cost avoidance and strategic approach. In the compliance level, envi-
ronmental and sustainability analysis are primarily driven by the need to meet
government or industry regulations. In this compliance stage, a firm’s efforts are
guided primarily towards calculating the minimum costs associated with existing
compliance requirements. In the cost avoidance phase, firms have typically gained
experience by measuring compliance costs and they have “learned” to appreciate
the benefits of prevention, and “move” into the mindset of “investing to save”
through a cost avoidance process that tries to anticipate environmental costs.
Managing sustainability using a “strategic” mindset requires firms to approach
Integrating Sustainability in Capital Budgeting Decisions 105

sustainability issues proactively, by actively incorporating environmental costs and

benefits as opportunities to capitalize from the knowledge and understanding they
provide about operations, processes and systems. Unlike the compliance and cost
avoidance mindsets – both of which deal with environmental costs as constraints –
the strategic approach sees environmental costs as a strategic business opportunity
to create value.
Firms have become increasingly sensitive to environmental and sustainability
issues for many reasons: they might need to comply with current or future govern-
ment or industry regulations and standards, they need to identify costs through
product and process improvements that reduce inputs and waste or they might just
need to manage their image. Undoubtedly, managers need to measure and manage
legal and regulatory costs as well as societal costs associated with public
expectations regarding the need to preserve the environment using natural resources
carefully. But also, firms need to recognize that operating in a sustainable manner
generates environmental benefits, savings, revenues, and ultimately value which
might or might not be measurable. Regardless of the level of commitment to
sustainability issues – compliance, cost avoidance or strategic – managers can
benefit from understanding how to integrate sustainability into the important task
of deciding which capital assets to use in order to maximize shareholders’ and
stakeholders’ value while respecting the earth and the environment.

3 What Is Capital Budgeting?

Capital budgeting is also called capital allocation decision making, asset appraisal
analysis, capital investment appraisal and capital planning. Capital budgeting is the
process by which an organization determines which long term assets and
investments – such as the acquisition of machinery, plant, building facilities,
equipment, land, research and development – are worth pursuing in order to support
the firm’s operations and organizational goals. The process of acquiring long term
assets has significant strategic and operational importance since capital
expenditures usually represent a significant commitment of financial resources
which remain invested over a long period of time. Decisions related to the replace-
ment of serviceable – but obsolete equipment – in order to achieve cost reductions;
or capital expenditures necessary to increase product output or achieve market
expansion; all involve detailed and significant analysis.
Firms commit cash to a capital project or investment because they expect to
generate even more cash in the future. The value of a capital project is based on how
much discounted cash a project might generate in the future; the higher the NPV or
return, the greater the value of the project.
106 M.B. Kimbro

3.1 Capital Budgeting Methodologies

Firms with short term horizons, as a general rule, end up making suboptimal
allocation decisions. “Buying the cheapest” is no longer the acceptable approach
used in modern capital budgeting. Although traditional short-term horizon
techniques such as payback or accounting rate of return (ARR) are still used as
secondary methods, discounted cash flow (DCF) methods, including net present
value (NPV) and internal rate of return (IRR) are the primary and preferred methods
in contemporary capital budgeting analysis (Kim and Farragher 1981). Most firms
realize that the least expensive investment opportunity is rarely the best alternative
in the long-run. It is well established that long-term models to decision making
using DCF and NPV analysis that incorporate the time value of money and the need
to earn an internal rate of return that is higher than the cost of capital, are
undoubtedly the preferred approaches to make capital allocation decisions.
Capital budgeting methods have evolved significantly during the last 20 years.
Before the 1980s firms rarely used DCF and NPV methods; however by 1999, 75 %
of surveyed firms admitted using DCF and NPV to evaluate capital budgeting
decisions (Graham and Harvey 2001; Moore and Reichert 1983). Today, DCF/
NPV and IRR are the primary quantitative methods used in capital budgeting
analysis (Kim and Farragher 1981). As mentioned earlier, the payback and the
accounting rate of return are still used as a secondary screening in capital
budgeting.
The payback estimates how long it will take to recover the original investment,
by dividing the original cost of the investment by the annual cash flows that the
investment creates; the shorter the payback, the greater the project’s liquidity. On
the other hand, the payback creates an implicit bias in favor of short-term
investments since it ignores the cash flows that the investment might generate
after the payback period, as well as the variability of these cash flows and the
time value of money. Similarly, the (ARR) measures the return of the original
investment cost ignoring the time value of money and the cash flow variability.
Since virtually all capital budgeting decisions are analyzed with the use of
computer software, it is relatively easy to calculate all methods, and the difficulty
is limited to estimating the residual value and cash flows that the capital project can
generate, evaluating the risk and cost of capital, and measuring the intangible
benefits of acquiring the asset. Hence the real difficulty of deciding which invest-
ment to choose is not the determination of which method to use, but rather, it is
determining the inputs necessary for these calculations: (1) How much cash flow
each project will generate each year; (2) how to incorporate the uncertainty and risk
of these cash flow predictions into the cost of capital for each project; (3) What is
the “real” life of each capital asset: from “cradle to grave”; and (4) The cost-of-
capital or risk measure that will be used to discount the predicted cash flows for
each alternative
In order to calculate NPV for each capital asset alternative, we need to: deter-
mine the cash outflow of the initial acquisition costs (CF0), estimate the cash flows
Integrating Sustainability in Capital Budgeting Decisions 107

NPV = Total Present Value (PV) of future cash flows (CF i ) -Initial cost of the project (CF 0 ) (1)

r = discount rate
n = time period of the project or investment

Fig. 1 NPV formula

(CFi) for each year in the life of the asset, the cost of capital (r) for each asset, and
the number of years (i) that will be discounted on the true life of the asset: “from
cradle to grave” (Fig. 1).

4 Incorporating Sustainability into NPV and DCF:

Predicting Cash Flows

4.1 Stage One: Identify, Evaluate and Measure General

Costs and Benefits

In evaluating a DCF/NPV analysis the firm must estimate all future cash flows that
each investment generates. Cash flows for the life of each project – from cradle to
grave – must be estimated. In order to predict these future cash flows, the impact of
all areas affected by the proposed capital expenditure must be evaluated as well as
the riskiness of the expected cash flows, which will later be used to estimate the cost
of capital.
A basic screening of the traditional capital budgeting items to be included in the
cash flow calculation will be the first step in quantifying cash inflows and outflows.
Table 1 is a good starting point for this.
In order to incorporate sustainability into the estimation of cash flows, Life cycle
assessments (LCA) and life cycle costing (LCC) must be used in the analysis. LCA
and LCC enable firms to better understand the financial and environmental effects –
both costs and benefits- of capital assets, products, services and activities and thus is
an essential tool needed to predict future cash flows.
One approach of evaluating cash inflows and outflows is to ignore items that do
not vary in cost between one option to another. Equal costs will cancel out from
the NPVs of all the capital options and thus the focus of a capital budgeting
analysis should be on measuring incremental inflows, outflows, costs and savings
that vary from one option to another. However, as a matter of practice most of
the cash inflows and outflows differ significantly from one capital alternative to
the other.
108 M.B. Kimbro

Table 1 Initial inventory of costs and benefits

Costs
Initial, operating, Yes or no. If yes, Yes or no. If yes,
remediation, externalities explain and explain and
and other costs quantify Savings quantify
Purchase price Increase production,
revenues and sales
Taxes Tax rebates
Transportation costs Tax savings
Interest/financing costs Energy savings
Installation costs Water conservation
savings
Energy use (assume Revenues from recycled
increasing costs in cash externalities
flows)
Emissions and impacts Reduced costs of inputs
Costs of monitoring Waste disposal costs
emissions savings
License and permit costs Remediation/clean up
costs savings
Calibration costs Calibration costs
Plant or land space Space savings
Maintenance costs Maintenance costs savings
Training costs Training costs savings
Repair costs Repair costs savings
Material inputs (ink, Material inputs savings
detergents, fuel, etc.)
Insurance costs Insurance costs savings
Insurance fees to cover Reduced fees to cover
handling of hazardous handling of hazardous
substances materials
Waste disposal costs Waste disposal savings
Landfill costs and taxes Landfill costs and taxes
savings
Remediation/clean up costs Shut-down costs savings
Shut-down costs Fines and prosecutions
savings
Fines and prosecutions Increase in useful life
Capital asset disposal costs Disposal costs savings
Useful life

4.2 Estimating Cash Flows Using Life-Cycle-Costing (LCC)

Many environmental costs are hidden in overhead and general administrative

expense accounts, and their impact is not properly priced into the assets and
activities that created them. Relevant costs and benefits information are clearly
Integrating Sustainability in Capital Budgeting Decisions 109

key components of capital investment analysis that unfortunately are too often
ignored. LCC analysis clearly helps to identify these costs.
Eco-efficiency requires an integrated assessment of environmental and eco-
nomic aspects of assets and services from a life-cycle perspective. The concept of
life-cycle includes everything. Life-cycle implies the inclusion of all costs and
benefits of a capital investment from “cradle to grave”. In other words, LCC
assessment goes beyond the typical “useful-life” methodology frequently used in
accounting. Unlike economic analysis, in LCC all impacts of a capital asset are
summed up along the whole life-cycle in order to give a complete understanding of
the entire impact of owning a capital asset. LCA and LCC involve the recognition
and analysis of all costs and cash outflows as well as the benefits and cash inflows.
The costs of buying, financing, installing, maintaining, operating, repairing,
replacing and disposing of an asset are considered outflows of cash. All energy
savings, rebates, tax-savings, depreciation, productivity improvements, are consid-
ered inflows of cash. These cash inflows and out-flows are projected over the life of
the asset, adjusted for inflation and anticipated uncertainty, to determine the NPV of
each capital project. LCC involves a comprehensive evaluation of all direct and
indirect environmental impacts of a capital asset throughout its life and beyond its
“useful” stage. Managers who duly identify and analyze the full scope of a capital
assets environmental consequences, will be better equipped to make optimal
investments that will price a priori pollution prevention rather than remediation
and’end of the pipe’ solutions.

4.3 Stage 2: Use LCA for Initial Environmental Screening

In this stage an initial environmental screening is performed going through all

potential indirect and direct items that have a high probability of having an
environmental impact. Since the capital budgeting decision involves the selection
between different asset alternatives, all possible impacts must be measured and
assessed before going through any financial analysis. The following “checklist” is a
good starting point of assessment. Table 2 offers an example of an initial environ-
mental screening checklist that could apply for the purchase of a machine or
equipment. Of course, each organization and asset class will have particular issues
that should be tailored accordingly. The information from the Initial assessment
“checklist” will provide raw data and information that could be the starting point of
a quantification of sustainability and environmental costs.

4.4 Stage 3: Evaluate Eco-efficiency and Quantify Impacts

If the environmental screening reveals that the asset does create waste or external-
ity, then this item must be evaluated and its impact must be categorized using an
110 M.B. Kimbro

Table 2 Environmental screening

Yes If yes, please Remediation Toxicity
or explain which or disposal potential
Environmental Inventory no material or chemical costs from 1–5
1. Require hazardous raw materials?
2. Require hazardous lubricants?
3. Require hazardous cleaning agents?
4. Create waste water?
5. Emit particles into the air?
6. Generate heat or noise?
7. Do employees need special
protection equipment or clothing in
order to operate around asset?
8. Require plant modification to offset
environmental impact?
9. Have non-recyclable parts?
10. Do parts need special disposal?
11. Require reporting to regulatory
agency (EPA)?
12. Require inspections to regulatory
agencies?
13. Do parts and maintenance equipment
require special storage facilities?
14. Do parts and maintenance equipment
require special transportation?
15. Require special disposal?

impact category similar to the one presented in Table 3. Many of these costs are
“external” costs that are generally not considered in capital budgeting decisions.
These “externalities” have an impact on human health or eco-systems through the
release of toxic substances. Unfortunately, it is neither the firm nor the consumer
that bears these costs, but society as a whole and – eventually – future generations.
These impacts are obviously more difficult to quantify and it is up to the firm to
assess the weight it will give these in the capital budgeting analysis. On the other
hand, it would seem reasonable and responsible to integrate these costs in the
decision making if legislation can be foreseen that internalizes external costs for
certain waste, emissions, materials or externalities. This could be the case for CO2
taxes on fossil fuels or carbon emission taxation. For a more detailed analysis
various assessments have been developed that help quantify toxicity potential
(Bunke and Graulish 2002; Bunke et al. 2003).

4.5 Buildings: Other Tools for Estimating Cash Flows

In terms of capital investments in buildings, several green ratings systems have

developed metrics that define and measure both current and future building
Integrating Sustainability in Capital Budgeting Decisions 111

Table 3 Impact assessment and eco-efficiency analysis

Impact assessment ItemMeasurement unit Source
Waste W kg of waste equivalent All
Toxic waste TW kg of toxic waste equivalent Manufacturing
Air pollution AP kg sulfur oxides (SO2) Manufacturing, combustion,
equivalents power plants
kg of nitrogen oxides (NO2) Manufacturing, transport
equivalents
kg of carbon monoxide (CO) Manufacturing
equivalents
kg of particulates Manufacturing
Kg of Mercury (Hg) Manufacturing, power plants
equivalents
kg of volatile organic Manufacturing, solvents,
compounds (VOCs) transportation
Indoor air quality IAQ kg of radon (Rn) equivalents Land sites, mineral extraction
kg formaldehyde (H2CO) Manufacturing, maintenance
equivalents and cleaning
kg of asbestos Plant insulation
kg of volatile organic Manufacturing solvents
compounds (VOCs)
Inspection costs IC # of inspections per year Plant and equipment
Global warming potential GWP kg of carbon dioxide (CO2) Manufacturing, transportation
equivalents
kg of methane (CH4) Manure, agriculture, solid
waste, landfills
Water acidification AP kg of sulfur dioxide (SO2) Manufacturing, power plants
potential equivalents
kg of ammonia Manufacturing, food
processing
Ocean acidification OA kg of carbon dioxide (CO2) Manufacturing, transportation
equivalents
Aquatic eutrophication aEP kg of phosphate (PO43–) Fertilizers
potential equivalents
kg of nitrates (NO3) Fertilizers
Terrestrial eutrophication tET kg of phosphate (PO43
) Fertilizers
potential equivalents
Photochemical ozone POCP kg of ethylene C2H4 Chemical plants, petro-
creation potential chemical, agriculture

performance. Buildings’ “green metric” systems that can be employed and

integrated into the capital budgeting process are: Leadership in Energy and Envi-
ronmental Design for Existing Buildings and Operations and maintenance (LEED-
EB O&M); Green Globes for Continual Improvement of Existing Buildings
(CIEB), the Green Guide for Health Care (GGHC) and BRE Environmental
Assessment Method (BREEAM).
112 M.B. Kimbro

4.5.1 The Cost of Capital

The value of a capital investment is the expected cash flow discounted at a rate that
reflects the riskiness of the cash flow. If this value is greater than the original
investment cost, then the project has a positive NPV, if it is less, it has negative
NPV. Positive NPV projects create value, while negative NPV projects destroy
value.
The discount rate or the cost of capital is a function of the weighted average cost
of capital (WAAC) as well as the project’s perceived riskiness, with risky projects
requiring higher returns than less risky projects. Risk can be defined as the proba-
bility of exposure to any event or action that will adversely affect an organization
ability to create value. There is some evidence that firms evaluate risky investments
by estimating expected values, standard deviations, semi-variances of net cash
flows for each alternative investment, as well as multiple-criteria capital budgeting
models under risk by using higher discount rates that incorporate higher risk factors
(Kwak et al. 1996; Lin 1993; Pike 1983).
The importance of integrating risks into management decisions and in particular
into capital allocation decisions cannot be underestimated. These risks might be:
strategic, operational, reporting or compliance risks (Epstein and Recj 2005).
Sustainability issues are a component of each of these risk categories. Strategic
risks relate to the firms choice of strategies and include industry, transaction,
technological, political and organizational risks. Operational risks relate to threats
from ineffective business processes. Reporting risks, relate to the reliability, accu-
racy and timeliness of information systems – both internal and external. Compli-
ance risk relate to the inability of the firm to comply with applicable laws and
regulations.
There are two approaches of integrating environmental risks into capital
budgeting decisions. We can develop a Sustainability Risk Rate or we can quantify
the Sustainability Cost NPV that will capture the sustainability exposure of each
project.
In order to develop the “Sustainability Risk Rate” we need to evaluate each
capital project, through an environmental risk inventory and an eco-efficiency
assessment. Using these tools the firm must determine a risk rate that will be
added to the cost of capital of the project, therefore increasing the discount rate
and “penalizing” the project with a higher discount rate and thus a lower NPV.
Another way of quantifying the risks is to calculate a Sustainability Cost NPV by
quantifying the sustainability negative impacts and subtracting this amount from
each project’s NPV calculation. This involves identifying, classifying and
quantifying risks by multiplying each probability times each measurable impact
for each capital project and then discounting these risk exposures in order to arrive
at a negative NPV or sustainability cost measure that will be subtracted to the
positive NPV for each project.
Risk Exposure ¼ (Probability of failure)  (Cost of failure)
Calculating the Sustainability Cost NPV:
Integrating Sustainability in Capital Budgeting Decisions 113

1. Calculate the potential costs associated with each risk category.

2. Estimate the probability that each risk could materialize.
3. Multiply the potential cost of each risk by its expected probability to calculate
the expected value of each risk.
4. Estimate when the risk may develop. In the case of machines the probabilities
might increase as the asset gets older.
5. Calculate the NPV of each risk.
6. Aggregate and add the NPVs of all sustainability risks.
7. Subtract the Sustainability Cost NPV from the NPV calculation for each capital
alternative.

5 Conclusion

There is evidence that most firms do not consider environmental impacts in capital
budgeting decision making and analysis (Vesty 2011). There are also concerns that
conventionally accepted analytic methodologies like: DCF, NPV and IRR; do not
favor sustainability related investments and could even create bias against the
selection of sustainable alternatives in capital selection. Furthermore, there are
many hidden sustainability related costs that are “buried” in overhead and in
general expenses that are not captured in current capital budgeting analysis.
This chapter highlights the importance of identifying, measuring and evaluating
all costs and savings of alternative capital investments. Using Life-Cycle Assess-
ment (LCA) we can identify sustainability related costs from “cradle to grave” in
order to provide a template by which hidden environmental costs and benefits can
be identified, analyzed and priced.
I developed a model that integrates sustainability risks into the cost of capital
and into NPV calculations.
1. Identify, evaluate and measure general costs and benefits using an Initial Inven-
tory Analysis
2. Estimate Cash Outflow required to acquire a capital investment: CF0
3. Use LCA for the initial environmental screening checklist.
4. Evaluate eco-efficiency and quantify impacts.
5. Estimates Cash Flows for the life of the investments (CF1, CF2, CF3, CF4, . . .)
6. Estimate the sustainability risk rate and add it to the cost of capital (r).
7. Or, in the alternative, compute the NPV of the sustainability costs and subtract it
to the projects’ NPV.
8. Select an NPV Investment that has a positive NPV.
In today’s highly connected and well informed markets firms realize that
acknowledging and managing sustainability related risks is no longer an option
but a necessity for firm survival. Firm value encompasses all the activities of a
company. Some of these activities have wider impacts on society and the environ-
ment than others, but they all have the potential of creating sustainable growth and
development.
114 M.B. Kimbro

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A Study of Consumer Attitudes and
Behaviour Towards Sustainability in
Bradford, UK: An Economical and
Environmentally Sustainable Opportunity

Zahid Hussain and Jasdeep Singh

1 Key Writings in Sustainability

There are a wide variety of sustainability definitions, however through focusing on

some key indicators of sustainability, it will allow us to understand the complexity
surrounding sustainability, and it will be argued that all indicators and dimensions
of sustainability should be of equal importance. In this section critiques and
supporters of sustainability will be presented, and it will be portrayed that at the
moment certain motives outweigh one another due to influences from the consumer
and commercial worlds (Fig. 1).

1.1 Definition of Sustainability

With regards to legislations, sustainability is usually referred in literature as sus-

tainable development. This is the common term that is used by many authors’ and
legislative guidelines however it must be noted that there is a fine yet distinct
difference between the two as highlighted by O’Riordan (1988) whom stipulates
that the term sustainable development was brought into the limelight to add more
weight and importance to development in the physical sense such as buildings and
infrastructure, because growth and development needed to be re-directed rather
than stopped. The term sustainable development was firstly used in the Brundtland
Report so as to place equal importance on the economic dimension of sustainability

Z. Hussain (*)
School of Management, University of Bradford, Emm Lane, Bradford BD9 4JL, UK
e-mail: [email protected]
J. Singh
School of Management, c/o: Z Hussain, University of Bradford, Emm Lane, Bradford BD9
4JL, UK

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 115
DOI 10.1007/978-3-642-37018-2_6, © Springer-Verlag Berlin Heidelberg 2013
116 Z. Hussain and J. Singh

Fig. 1 Rich picture of sustainability

by meeting the needs of the people, thus reducing the high dependency on the
ecological dimension of sustainability, which may have hindered growth and
development. As stated in Henriques (2001) defines sustainability as: Sustainability
is the capability of an organisation (or society) to continue its activities indefinitely,
having taken due account of its impact on economic, social and environmental
capitals. (p. 32). In contrast to this the Brundtland Report as quoted by Dresner
(2008) defines sustainable development as: Sustainable development is develop-
ment that meets the needs of the present without compromising the ability of future
generations to meet their own needs. (p. 73). O’Riordan (1988), and Desai (n/d) as
stated by Dresner (2008, p. 70) criticize the definition of sustainable development as
being too vague. According to Kidd (1992) modern era sustainability stems from
six distinct roots:
1. Biosphere
2. Resource/environment
3. Ecological/carrying capacity
4. Critique of technology
5. No growth/slow-growth
6. Eco-development
Bell and Morse (1999) commit that the ecological/carrying capacity root is the
spine of sustainability as seen in Fig. 2. Through analysis the biosphere, resource/
environment, ecological/carrying capacity and critique of technology roots can be
seen to adhere to the ecological/environmental dimension.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 117

Fig. 2 The roots of the

modern view of
sustainability (Source: Bell
and Morse (1999, p.6))

The no-growth/slow-growth and eco-development roots attach themselves to the

economic dimension, meaning that no original roots apply to the social dimension.
This ultimately means that there is an imbalance in the importance of each
dimension, with the social dimension being left in the background. This ties in
with the purpose of this research as it aims to identify the shortcomings and
understand the relationship between sustainability and the social dimension from
the consumers’ perspective.

1.1.1 Types of Sustainability

Authors such as Ison et al. (2002), Dresner (2008) and Bell and Morse (1999) all
agree that there are two main types of sustainability, weak and strong.

1.1.2 Indicators of Sustainability

In order to measure the rate and effectiveness of sustainability, a typical set of key
sustainability indicators are crucial. Bell and Morse (1999) present key indicators
based on qualitative techniques rather than the typical quantitative approach,
similarly aligned with the research to be conducted in this thesis, as it will involve
both a qualitative and quantitative aspect. By looking at Fig. 3 we can see the three
perspectives of sustainability; sociological, economic and environmental, but the
issue is which perspective should have prominence?
118 Z. Hussain and J. Singh

Fig. 3 The three

perspectives of sustainability
(Source: Henriques (2001,
p. 42))

However Fig. 4 depicts an equal weighting and integration of all of the three
perspectives of sustainability in order to achieve harmony between all of the
dimensions.
The contemporary sustainability indicators are expressed by Edwards (2005) as
the ‘Three E’s plus one’: (1) ecology/environment, (2) economy/employment, (3)
equity/equality, (4) education. We can assume that these indicators provide a good
balance as the indicators are spread across the three dimensions of sustainability
with an increased weighting for the social dimension with the equity/equality and
education indicators. Authors such as Wise (1999), Sibbel (2009) and Edwards
(2005) all permeate that the education indicator is the catalyst for change in the
future, as from knowledge, collective action can be achieved through overcoming
the problems of normative, emotional and cognitive obstacles thus altering the
value structure of communities.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 119

Fig. 4 Balancing sustainability perspectives depicting the interactions between ecological, eco-
nomic and social development (Source: Bell and Morse (2003, p. 4))

1.1.3 Past Studies of Sustainability and Consumers

With the advent of the sustainability revolution, the focus of sustainability is on

understanding how consumer attitudes and behaviour can be manipulated to pri-
marily benefit the environment but more importantly to maximise levels of profits,
as businesses and the national level governments look to capitalise on the opportu-
nity to lull consumers into ensuring the long-term prosperity of the social, economic
and ecological dimensions.

Consumer Attitudes

The Guardian (2010) conducted research into ‘consumer attitudes and perceptions
on sustainability’ documenting the impact of ethical and environmental impacts on
consumer buying behaviour. The survey was conducted in 2010 and involved
766 members of the Guardian News and Media consumer Brand Aid Panel. This
research presented that consumers were more or less equally concerned about a
range of various environmental sustainability issues but the top three concerns
consumers had regarded pollution, over-use of resources and climate change, a
120 Z. Hussain and J. Singh

finding that mirrored the expectations of Edwards (2000) whom expressed that
the fair distribution of resources was a necessity for collective action as a commu-
nity. This cements the issue of consumers expressing the values of the equity/
equality indicator developed by Edwards (2005), signalling a move in the right
direction. The European Commission (2009a, b, c) conducted similar research
into establishing attitudes towards sustainable consumption and production by
interviewing 26,500 people in 2008 across the 27 EU member states which resulted
in consumers acknowledging that minimizing waste, eco-friendly production and
efficient sustainable modes of transportation are the key actions with greatest
impact on solving environmental issues. In a similar research conducted in 1994
by Macnaghten et al. (1995) consumers portrayed an apparent mistrust and disbelief
in politicians and claims made by public bodies or institutes with regards to
sustainability. It involved eight types of focus groups with six to ten people in
each group, the groups were split into the following; young men, Asian women,
mothers, unemployed men, retired, rural professionals, working class women and
young professionals. The research aimed to explore public perceptions of
sustainability in Lancashire, similarly aligned to the context of the research we
are to conduct but with a difference being that it is based in Lancashire on a county
level whereas our research is based on a city/metropolitan level.

Consumer Perceptions

An interesting discovery by Marsh et al. (2010) and The Guardian (2010) suggests
that consumers perceive sustainable products as having a premium price tag.
However Homburg and Matthies (2010) as stated in Hanss and Böhm (2010)
suggests that the key to achieving sustainability is through understanding what
consumers associate with the term sustainability, how important the sustainability
dimensions are in relation to each other and what is considered as sustainable
purchase decisions in order to boost sustainable consumption. Marsh et al. (2010)
used interviews and questionnaire analysis of 14 people from different backgrounds
and looked into their behaviour towards sustainability in fashion and established
that self-image and peer acceptance played a big role upon the consumer buying
decision even though the consumers had good ecological awareness. The research
outlined that in a situation where self-image or peer acceptance is of importance
then this would take precedence over the sustainable choice regardless of the
consumers’ attitudes towards sustainability, suggesting that sustainability options
need to be desirable.
In The Guardian (2010) consumers place sustainability in fourth position ahead
of brand loyalty in the deciding factors to buy, as firstly the quality of the product,
secondly the price of the product and thirdly the availability of the product are the
key deciding factors. However in European Commission (2009a, b, c) sustainability
is placed in third position behind price but again ahead of brand loyalty. The
Guardian (2010) establishes that a high majority of consumers would be willing
switch to products with a low environmental impact, however he fails to consider
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 121

Fig. 5 The IUCN (World Conservation Union) barometer of sustainability (Source: Bell and
Morse (2003, p. 43))

that what this suggests is that consumers are willing to embrace environmentally
friendly products if firstly the quality of the products are equal to non-
environmentally friendly products currently on the market, the price is equivalent
to current products without the premium and thirdly that the environmentally
friendly products are easily available.
These findings suggest that consumer perceptions of sustainability have devel-
oped over the years, as initial research conducted to understand the perceptions of
sustainability by UK citizens by Macnaghten et al. (1995) and Macnaghten and
Jacobs (1997) suggested that a majority of respondents did not understand the
concept of sustainability or ecological issues which would affect current and future
generations. Importantly however the research looked into ways of improving the
awareness and understanding of sustainability and it mainly identified that the
respondents suggested that education would improve the understanding and aware-
ness of sustainability, thus indicating a need for development in the social dimen-
sion, which gradually would lead to a change in social values as perceived by
Edwards (2005).
Figure 5 portrays a barometer of sustainability through which we can visualise
the past, current and future stages of sustainability. In the past, human wellbeing
could be classed between bad and good but the ecosystem wellbeing would be
classed as being bad ultimately meaning that such actions and attitudes would be
unsustainable. In current times, human wellbeing can be classed between poor and
122 Z. Hussain and J. Singh

good with the ecosystem wellbeing being classed between poor and good as well,
meaning that current attitudes and actions still remain potentially unsustainable,
intermediate or potentially sustainable. However the aim is to become fully sus-
tainable in the future which will require human well-being to be classed as good
alongside the ecosystem wellbeing being classed as good.
Edwards (2005) presents a variety of sustainability labels or accreditations that
consumers may identify during purchasing that should guide purchase decisions
through identification of sustainable products. According to Hanss and Böhm
(2010) however these labels proved to create confusion amongst consumers as
they did not recognise them due to the wide variety being used, however a point to
consider is that the findings of The Guardian (2010) indicate that consumers would
only place trust in a brand/product/company/institution if there was accreditation
through environmental awards, scientific backing or positive media coverage.
Additionally, The Guardian (2010) indicated that the term ‘greenwash’ was losing
momentum as consumers were increasingly becoming wary of companies whom
used this practice to appear environmentally friendly. However looking at house-
hold income levels The Guardian (2010) identified that the higher household
income levels showed a greater degree of awareness towards environmental
impacts when buying groceries and utilities than compared with lower level income
groups. This suggests that there might be a link between the level of knowledge/
education, profession and income levels in the understanding, attitudes and
behaviours of consumers towards sustainability, as there is very little understanding
about this possible perspective, which is why this thesis will aim to explore this
area. The research conducted by Macnaghten et al. (1995) has become old and
irrelevant as social values have changed over time dramatically, which is why this
research will provide an updated insight into modern consumerism.

Community Action

We must be the change we wish to see in the world- Mahatma Gandhi

Power (2004) stipulates that a sustainable community depicts characteristics

that uphold all ecology/environmental, social and economic dimensions of
sustainability. Laguex (1999) suggests policy creation by people and institution is
greatly influenced by communities and therefore it can be assumed that for social
cohesion to form it is vital for the formation of communities acting together to
further sustainability. Communities need to embrace values and initiatives such as
the fair distribution of resources as suggested by Edwards (2005) and embracing
equity/equality.
There have been several sustainability policies that incorporate communities
into their efforts. These policies have been developed at state, national and interna-
tional levels with the most noticeable being the Earth Charter. Edwards (2005)
conveys the most thorough and collaborative attempts towards sustainability was
made by the Netherlands in the state level policy titled NEPP established in 1989.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 123

Fig. 6 Horizons of
influence, attention and
responsibility in
sustainability (Source: Bell
and Morse (2003, p. 13))

This policy has continually developed inspiring many other nation states to
follow suit.
Figure 6 illustrates the importance of communities and the power of their
collective action, as we can see that communities have a horizon of responsibility
over the next few years but one which will most definitely act as an influence for
future generations. The importance of national and international awareness is also
depicted as only through achieving all of the three horizons will sustainability
efforts be effective. In the research conducted by Macnaghten et al. (1995), the
findings suggested that consumers associated the word sustainability as being a
global issue that could only be solved if the global community acted together. The
consumers also showed a strong feeling towards the fair distribution of resources an
aspect that is further picked up recently in the research conducted by The Guardian
(2010). However what this does indicate is that consumers in 1995 did have the
correct social values to allow social, economic and environmental change to be
realised in the future. A feeling of empowerment, which is brought about by a sense
of belonging through collective action as a community, consumers gain positive
experience in engaging in sustainability. However other than this, there has been no
significant research into the perceived depth of involvement as a community
consumers believe they are attached to or involved in and are a part of. These
communities may be in the form of sustainable organisations or bodies or
institutions that provide advice, develop products or technologies or even hold
meetings to engage people at a community level with a global level issue. This
insight will provide a valuable analysis of how many people are affiliated with these
communities and how much they engage with the communities, ultimately
providing us with information suggesting which sustainable communities are
most prevalent and consumer attitudes towards these communities. Other aspects
that our research will build upon is understanding the depth of knowledge each
consumer group has based upon certain variables such as age, occupation or income
which will allow us to determine any links and therefore suggest recommendations.
124 Z. Hussain and J. Singh

Importance of Communications

The Guardian (2010) has stipulated that effective communications are made only
possible through affiliations or accreditations with credible third parties. This can
be understood to be a very logical and important means of ensuring that companies
live up to their expectations and commitments and that its actions support its
assertions as the companies will be open to scrutiny from independent third parties
such as environmental bodies whom will judge the performance of the companies
and report their findings. Thøgersen (2005) however highlights that communication
made by the government should not be heavily pressing on the consumer because it
might lead to de-motivation which in turn would lead to a sense of helplessness.
According to Thøgersen (2005) one effective form of communication would be to
use facts related to an issue which the consumer can relate to, secondly through the
use of guilt appeals consumers tend to show a greater degree of responsibility.
However guilt appeals tended to be counter-productive as companies whom used
such means of communications resulted in consumers exhibiting negative attitudes
towards the advertisement and organisation if the consumer believed there was
manipulative intent in the communications. The other method of communications
would be through using control appeals, which would not create a heightened sense
of responsibility.
Controversially Giddens in Dresner (2008) conveys that growth of communi-
cations has fuelled globalisation because as ideas and fashion are spread around the
globe so quickly that they cannot be kept up as they are not in line with tradition and
therefore cannot be planned for, which in turn has led to the hindrance in
sustainability efforts. However according to Mader (2008) companies perceive
communicating green messages to the mass media as being too expensive and
difficult, as there is a prospect of limited profitability even though Dolan (2002)
suggests that through communicating green messages as sustainable marketing
companies can increase brand equity and reputation. Communication of green
messages would only be beneficial is sustainability is addressed as a multi-faceted
topic concerning the ecology/environmental, social and economic dimensions.
Consumers perceive business practices as being a fad, and other research has
conveyed the same response towards politicians and their policies, which is why
it is suggested that companies must seek to educate consumers rather than just
having a short-term incentive of achieving profits whilst at the same time window
dressing the corporate image as being sustainability promoters. This research thesis
aims to explore how sustainability communications can be made more effective and
positive from the perspective of consumers, which is important, as the consumers
are the intended targets of the communications.

Effect of Public Policies

Thøgersen (2005) states that one of the main aims of consumer policy is to
‘empower’ consumers to be able to make informed decisions through means of
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 125

information and education. In relation to sustainability this would mean consumers

being able to make sustainable buying choices through for example identifying
labelling that confirms the product as being sustainable. The public policies must in
alignment with community values and expectations.
According to Wilkins (2008) political discourse has put a much greater emphasis
upon the protection of the ecology/environmental dimension rather than on other
aspects such as economic welfare and social fairness. However this stance is
supported by Fischer et al. (2007) whom indicates that the hierarchical system of
where the ecology/environmental dimension should prevail in front of the social
and economic dimensions. Macnaghten et al. (1995) stipulated that consumers
believed that public policies developed by politicians were influenced entirely by
commercial organisations. This meant consumers believed that policies were being
introduced for primarily creating profits rather than primary concern being to save
the environment. In suggestions made by The Guardian (2010) they suggest that
maybe the new government may provide ‘some leadership in this area’ however
conclusively the research does not attempt to understand whether consumers place
any trust in politics or politicians and if so how much because research conducted
earlier by Macnaghten et al. (1995) had suggested that consumers would not trust
the government or any public body to act primarily in the interest of the ecology/
environment. This shortcoming however will be overcome in the research that we
conduct as we will try to understand whether consumers in the modern era trust
politicians and public bodies to advance sustainability and after this finding then
suggest whether a private or public body route would be best.
Thøgersen (2005) portrays that public policies may empower consumers to
establish sustainable lifestyles. Thøgersen (2005) suggested that politicians should
not solely rely on existing and traditional consumer policy instruments firstly due to
the fact that consumers have no trust or confidence in the credibility of policies or
politicians and secondly because the rate of change towards sustainability is really
slow, which is why a fresh new approach is necessary. In their research Lafferty and
Meadowcroft (2000) concluded that governments need to take a more pro-active
stance and increase their commitment towards sustainability if they wish to influ-
ence and convince consumers that they are acting in the primary interests of
ecological and social welfare. Further Wise (1999), Sibbel (2009) and Edwards
(2005) argue that educating consumers about sustainability will act as a catalyst
towards change.
We have established that consumer information and education is a key tool in
consumer policy success. This is why Zelezny (1999) recommends that
sustainability education is beneficial and Vaughan et al. (2003) suggest that educa-
tion with regards to sustainability should be included in the school curriculum and
in higher education as positive changes in attitudes are realised instantaneously as
children would influence their parents as well, long-term changes are also realised.
This is why Thøgersen (2005) stipulates that sustainability education and informa-
tion should not be limited to just mass media campaigns, a move typical of
businesses to promote their products and services or by the government to promote
awareness as a short term solution. He stipulates that there are very limited
126 Z. Hussain and J. Singh

possibilities of realizing changes that promote sustainability to consumers through

standards or legislative restrictions. Instead what he suggests is that the desired
change can be realised through varying consumer choices of product offers avail-
able and removing pervasive subsidies, ultimately meaning that products should be
priced correctly in the first place. Research conducted by Wier and Calverley
(2001) suggests that if sustainable products are priced more affordably to suit a
large majority of consumers whom are restricted to budget constraints (Thøgersen
2005) then this has proven to show that consumer choices adjust overtime in favour
of choosing sustainable products. This finding re-instates the finding that consumers
still place price as the most influential indicator when making a decision to buy. Our
research will aim to establish whether consumers trust politicians to act in the
primary interest of the environment and highlight what consumers believe would
make a real change towards supporting sustainability.

Significance of Rewards/Recognition/Profitability

According to Capozucca et al. (2009) it is suggested that companies whom exhibit a

pro-active behaviour and take the lead in promoting sustainable practices and
products through making consumers envisage that sustainability is achievable
without sacrificing quality or availability or having too pay a premium price, then
these businesses will successfully engage all consumers in creating a new market.
However businesses have hindered to engage in this activity due to a prospect of
limited profitability, as consumers are not willing to pay a premium price for
products regardless of their attitudes towards sustainability. Figure 7 depicts the
zones of responsibilities of a company, and what areas and stakeholders it can either
control or influence with sustainable practices or schemes. As can be seen from the
diagram the company can definitely control the actions of employees and suppliers
but also has partial control over customers and the impact of its actions on the
environment as highlighted by Henriques (2001). An interesting point to notice is
that the company has a wider and greater zone of influence, which covers the whole
of the customers, suppliers, local communities and the public. This means that good
practice and promotion of sustainability stemming from companies would be
beneficial as it causes a ripple effect that should influence the attitudes and actions
of all the stakeholders.
Further to this Capozucca et al. (2009) recognizes that politicians and
governments are trying to establish better ways of regulation and controlling
price externalities without compromising standards of living and the report suggests
that businesses should aid politicians through adopting sustainable practices and
developing sustainable products. At the current moment there is little if any,
monetary rewards or regulatory requirements for companies to promote
sustainability. However with reference to The Guardian (2010) the research
suggests that consumers would highly trust companies that had been accredited
through environmental bodies and/or awards, so engaging in sustainability would
be beneficial for companies in the long term as accreditation is a form of
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 127

Fig. 7 Zones of company responsibilities (Source: Henriques (2001, p. 28))

recognition which in turn would boost consumer confidence in the company,

attracting potential consumers and therefore increasing revenues and hopefully
lead to an increase profits.
The issue is that these gains are not easily quantifiable and according to
Wirtenberg et al. (2007) it is a very difficult task to promote sustainability and it
is very expensive to implement, without any assumption on how long the payback
period will be as the current business model is centered upon maximising profit-
ability but this business model will have to change in order to accommodate any
sort of sustainability, a view that is supported by Capozucca et al. (2009).
Businesses can benefit from cost efficiencies and through generating top-line
growth as per the views of the World Business Council on Sustainable Develop-
ment. Hussain (2012) co-ordinates that the current sustainability agenda is being
driven by the triple bottom line concept with profit being at the forefront ahead of
people and planet. However from a consumer perspective, the significance of
recognition from the society is crucial to making the individual experience empow-
erment, which is achieved through appreciation and acceptance of their
contributions. From a business perspective Strandberg Consulting (2009) outlines
that recognition is vital for the business in achieving cost efficiencies, an enhanced
reputation, increased customer loyalty, improved access to capital, better ability to
plan strategically for the future and better supply chain management. Strandberg
Consulting (2009) have also conveyed that companies whom implement
sustainability into their corporate agendas experience less volatility in their stock
price returns. Such is the increasing significance of sustainability that Price
Waterhouse Cooper’s conducted a survey in 2003 of company CEO’S, in which
128 Z. Hussain and J. Singh

it reported that 79 % of CEO’s agreed that sustainability is vital to the profitability

of any company and 71 % of CEO’s said that when implementing a sustainability
program they would forgo short term profitability in exchange for long-term
shareholder value.

Role of Publicity

Hanss and Böhm (2010) suggest that consumers increased awareness and percep-
tion of sustainability in what Edwards (2005) describes as the ‘sustainability
revolution’ has been realized because of the increased publicity of sustainability
issues by the media after 1997 in which the research conducted by Macnaghten and
Jacobs (1997) of UK citizens suggested very low awareness and understanding of
sustainability. Another valid reason for this increase in awareness is down to
sustainability featuring in many political agendas across the globe, as it has slowly
become a global issue.
However during the 1990s media attention towards environmental issues took a
turn as the media only publicised events or issues regarding sustainability
containing some type of scandal or events that included celebrities. This led to a
hostile environment for businesses that was a direct result of a ‘consumer backlash’
as suggested by Crane (2000) because of businesses making deceitful or over the
top sustainability claims. With the media becoming critical of business claims
towards sustainability, many companies believed that it would be best to keep a
low profile with regards to green issues, however companies should have realised
that this opportunity could have been used to correct and fine tune green practices.
Further to this, with sustainability issues becoming a daily agenda for consumers,
this means that consumers are gaining direct experience of the issues involved, as
they have to adapt their practices or engage in initiatives such as recycling schemes.
The issue is that consumers initially relied upon the media for information on
sustainability because it was a virgin topic, which had a novelty and novelty
element to it because consumers had little or no knowledge of sustainability, but
now this is not the case and he believes that this might be because consumers have
developed sufficient knowledge over the years and/or the problem is still existent
but media coverage is insufficient to maintain consumer interest in the issue. He
conveys that a degree of boredom has been attached to sustainability due to the
continued existence of the issues, which has been summarised by Dunlap (2002) as
novelty being a long lost asset. What this suggests is that the effect of media
attention is only maximized if the issue in question is either new or the issue is
cast in dramatic and persuasive manner a thought that is supported by Thøgersen
(2005) through the use of guilt appeals.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 129

1.1.4 A Step Forward

What is the good of having a nice house without a decent planet to put it on? Henry David
Thoreau

Regulations relating to sustainability are relatively recent; according to Baroudi

et al. (2009) the majority of sustainability standards act as soft law such as The Rio
Declaration and therefore acts as guidance for companies to follow if they wish.
Agenda 21 the global programme of action on sustainable development contains
chapters on the social dimension of sustainability. But non-compliance with the
agenda does not constitute a legal offence as Agenda 21 simply acts as guidance. As
Bell and Morse (2003) stipulate there are no sustainability guidelines or regulations
that are applicable to consumers, rather much a consistent array of guidelines are
available for businesses, with legislation being very limited in this field. But what
needs to be raised is the issue that in the future these standards would need to be
transformed into being mandated, so the forward thinking company would essen-
tially act now to form a culture of continuous improvement in sustainability
planning.
However a common consensus is that many researchers believe that the way
forward is through education, values that can be instilled into consumers through
sharing collective knowledge as a community that should lead to a collective action
and a sense of empowerment. In the research thesis we shall determine whether
consumers of today agree that education would be the most effective way of
increasing awareness and promoting sustainability. Prothero et al. (2011) recent
research suggests that the government should take the lead with regards to increas-
ing consumers’ environmental and social awareness. This is advice is contradictory
to the findings mentioned earlier by Macnaghten et al. (1995), which is why it is
important to determine the stance of consumers against sustainability being man-
aged by politicians and how it influences them.
The main differentiating point between this study and previous research is that
none of the other research has asked the question of whether they believed that
action should have been taken earlier? And whether they believe collective action,
as a unified global community with a common agenda should be brought into action
through legislative rules that have to be adhered to on a mandatory basis rather than
just acting as guidelines?

2 Primary Research

2.1 Research

This research is analytical in nature and explores how sustainability is perceived by

consumers and explain why consumers have particular attitudes towards
sustainability. The research is also predictive in that we shall speculate that higher
130 Z. Hussain and J. Singh

levels of education help consumers better understand and implement sustainability

practices and that a more pro-active and long term stance needs to be taken by
companies a view supported by IGD (2011), and society in order to ensure the
sufficient advancement of sustainability. Through adopting both an analytical and
predictive approach we shall be able to fully understand and justify the current
stance of consumers towards sustainability and suggest ways to improve consumers
attitudes and awareness relating to sustainability. As this research considers the less
tangible aspects such as the attitudes and perceptions of consumers it will adopt a
qualitative approach. Further to this, the research will be typical of inductive
research as we aim to explore what sustainability means to consumers, however
this will be very time consuming but the results attained may provide extra insight
that may not have been discovered before.
The reasons why this approach has been taken is because questionnaires facili-
tate the collection of data through asking people to respond to the set of questions
without having to incur costs in moderating the communication as in focus groups
and telephone interviews. By using postal questionnaires substantial time will be
saved as the questionnaires will be completed by the respondents at their earliest
convenience and so will allow us greater time to analyse the results once the data is
collected. As a benchmark we shall aim to achieve a response rate of 30 % or more
and a target sample number of 150 people. To ensure that the questionnaires are
designed effectively and efficiently, we shall pilot the questionnaires amongst
several consumers initially to gain feedback from them as to whether they think
the questions are easy to interpret and suggest what things can be improved or
changed. Through ensuring that the questionnaire is well designed, processing and
analysis of the results will be made much easier as the results can be quantified.

2.2 Data Collection

Our research data collection instrument was a questionnaire that consisted of

20 questions, which were mainly multiple choice but also included a variety of
open-ended, measurement scale and graphical style questions. The questionnaire
was spread out over three pages and the questions were arranged in a logical
sequence according to which objective the questions answered and also which
sub-set topic the question belonged to within the sustainability group. These
sub-set topics gave the questionnaire a valid structure as questions related to key
topics that influenced sustainability and topics that were identified and discussed
within the literature review, thus acting as a set of key criteria. Firstly however, the
following information had to be filled in by the respondents, as these variables are
key to the analysis of the results:
• Gender
• Age
• Postcode
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 131

• Occupation
• Level of income
• Level of education
These variables are really crucial to this research, as based upon these variables
we look to establish the effect that these variables may have upon consumers
perceptions and attitudes towards sustainability and in doing so look to identify
any links between these variables and differences in perceptions and attitudes of
consumers. The seven sub-set topics are as follows:
• Awareness (questions 1–4)
• Perceptions and attitudes (questions 5–9)
• Communications (questions 10–12)
• Communities (questions 13–15)
• Public policies (questions 16–18)
• Rewards and recognition (question 19)
• Publicity (questions 20)
Out of the total 155 respondents, 122 respondents completed the postal ques-
tionnaire and 33 respondents completed the questionnaire in-person at a retail store.
The postal questionnaires were distributed on a random basis throughout Bradford
ensuring that several postcode areas were covered to ensure a consistent and fair
representation of consumers in Bradford. The respondents had the option to either
post the questionnaires back through a pre-paid envelope that was included or they
could simply hand in the completed questionnaires at pre-designated convenience
stores appropriately distributed across Bradford. The majority of postal
questionnaires were received back through the post within 2 weeks however a
very small minority chose to drop the completed questionnaires at some of the
designated drop off points. For the in-person questionnaire, with permission from
the partners of the retail store, I was allowed to engage with customers in-store and
ask them whether they would be willing to participate in the research. The retail
store was a multi-award winning convenience store named J&H Local that is
located on the outskirts of Bradford that has a strong customer footfall bringing
in customers from all areas of Bradford.

2.3 Data Analysis

The qualitative data was generated from the open-ended questions that will be
analysed in such way that key recurring information from each question and
questionnaire will be extracted and then coded. This provides us with the ability
to study and interpret this coded information and then look at the significance of the
remaining qualitative information. The qualitative information will then be
interpreted using a consistent data structure that will also apply to the quantitative
information. The benefits of doing this, is that we shall be able to gain an
132 Z. Hussain and J. Singh

understanding of the issues according to different hierarchical levels. Further to

this, it will allow us to conduct further analysis through identifying how the
variables effect the sub-topics of sustainability. The data structure will contain
the following aspects:
• Gender
• Age
• Postcode
• Occupation
• Level of income
• Level of education
For the measurement scale question number six that uses a ranking system, the
data will be analysed using a meaningful scoring system. To use such a scoring
system for analysing a question that involves the indication of preferences is
supported by Pretty et al. (1995) and Abeyasekera et al. (2000). The scoring system
will involve the following aspects:
• 1ST PREFERANCE ¼ 4 POINTS
• 2ND PREFERANCE ¼ 3 POINTS
• 3RD PREFERANCE ¼ 2 POINTS
• 4TH PREFERANCE ¼ 1 POINT
The option with the highest score will ultimately prove to be the most critical in
the evaluation. Further to this, this will allow us to conduct statistical analysis of the
results through conducting mean analysis.
The quantitative data that arises from the multiple-choice and graphical
questions will also be subject to quantitative analysis using the same data structure
so as to ensure comparability. All of the results will be presented graphically in the
form of either bar, pie or radar charts.

3 Results

3.1 Awareness

For this topic we shall present the results of question numbers; one, two, three
and four.

3.1.1 Q.1-Awareness of Environmental Impacts of the Products Bought

and Used

Figure 8 indicates that still a large majority of the consumer population in Bradford
roughly 4 in 10 (39.9 %) consumers are unaware of the true extent of sustainability
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 133

Fig. 8 Q1. How much do

you know about the
environmental impact of the
products you buy and use?

and how their product consumption and use has an indirect negative effect on the
environment throughout the value chain process, from the cradle to the grave.

Socio-demographic Considerations

An interesting discovery is that the 62+ age group has greater awareness of
environmental products than the youngest age group, as only 6.2 % indicated that
they know very little, with an equivalent amount of 18.8 % indicating that they know
nothing at all. The age group that displayed the best awareness of environmental
impacts was 51–61 as 77.4 % of the consumers in this age group indicated that they
either are fully aware or know most of the significant impacts, with the 29–39 age
groups trailing behind in second place with 70.4 %. This can be directly correlated
to students and retired people, as 81.9 % of retired consumers indicated that they
are fully aware or know most of the significant impacts compared to a substantially
lower 33.3 % of students.
However the most decisive result obtained is that 15.6 % of consumers who had
no university degree indicated that they know nothing at all and 30.3 % indicated
that they know very little about the environmental impacts. However in comparison
to this 2.4 % of consumers with a university degree indicated that they know
nothing at all and 23.8 % indicated that they know very little.

3.1.2 Q.2-Awareness of Sustainability Labels/Eco-Labels?

Figures 9 and 10 that depicts the relativities, the Rainforest Alliance logo in
comparison to the other logos is recognised 17 % of the time with the Energy
Saving Trust being recognised 20 % of the time just behind the Forest Stewardship
Council at 23 % of the time. The huge lack of awareness of the European
134 Z. Hussain and J. Singh

Fig. 9 Q2. Are you aware of any of the following sustainability labels/eco-labels?

Fig. 10 Q2. Are you aware of any of the following sustainability labels/eco-labels?

Sustainabilty logo can be seen with just 6 % awareness compared to the 34 %

represented by the Fairtrade symbol.

Socio-demographic Considerations

In general females indicated a greater degree of awareness of the logos across the
majority of the logos in comparison to their male counterparts. The females
recognized the other three logos bar the Energy Saving Trust and Rainforest
Alliance to a greater combined degree of 20.5 % in comparison to the males.
Again the results indicated that consumers with a university degree showed
greater total awareness of the sustainability logos by a greater net degree of 32.7 %
than compared to consumers who did not have a university degree at all.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 135

Leaf
Shipley College
Q.3 - Are you aware of any bodies or insitutions t...

University of Bradford
FSC
RSPB
Soil Association
Marine Conservation Society
LEAF
Sustainable Development Comission
Imeche
Act on CO2
Bradford Environmental Action Trust
Carbon Trust
Bradford Council
Considerate Constructors
Friends of the Earth
Fairtrade
Green Peace
Other
Yes
No

0 20 40 60 80 100 120
Count

Fig. 11 Q3. Are you aware of any bodies or institutions that promote sustainability?

3.1.3 Q.3-Awareness of Bodies/Institutions Promoting Sustainability?

Roughly only a quarter (26.4 %) of Bradford consumers answered that they are
aware of a body/institution that promoted sustainability. Out of this 26.4 %, 20.6 %
of consumers mentioned a particular body/institution that promoted sustainability,
with Greenpeace being stated the most amount of times by consumers accounting
for a minuscule 3.3 % awareness overall. As can be seen from Fig. 11, a very large
majority of consumers, exactly 72.3 % indicated that they are not aware of any
bodies/institutions that promote sustainability. A small minority of consumers
(5.8 %) simply indicated that they are aware of bodies/institutions but did not
state any.

Socio-demographic Considerations

The age groups of 18–28 and 29–39 indicate a lower degree of awareness of bodies/
institutions that promote sustainability than compared with the older age groups.
The 18–28 age group represents 26 % awareness, the 29–39 indicates 21.4 %
awareness compared to the 62+ age group which represents the highest awareness
at 31.3 %. Interestingly, from an income perspective the results indicate that the
income group of £30,000–£45,000 that can be attributable to medium class society
shows the highest degree of awareness with 40.9 % indicating and stating a body/
institution that promoted sustainability. The income groups at either end of the scale
136 Z. Hussain and J. Singh

representing the lower class and higher class societies indicated lower awareness,
with the < £15,000 group showing 16 % awareness and the > £60,000 group
showing 26 % awareness. Repeatedly, the results indicated that 40.5 % of
consumers whom had attained a university degree showed that they are aware of
a body/institution that promoted sustainability compared to 22 % who had no
university degree.

3.1.4 Q.4-Most Effective and Influential Form of Communication?

Approximately 6 in 10 consumers (59.3 %) answered that media campaigns were

perceived as being the most effective and influential in promoting the awareness of
sustainability with education classes/courses being the second preferred choice
with 2 in 10 consumers (20.7 %). A small minority of consumers at 7.3 % believed
that government publications was the best choice and 12.7 % believed that com-
mercial schemes would be the most effective and influential.

Socio-demographic Considerations

Consumers that work in the education sector also believe that the most effective and
influential form of communication to promote awareness of sustainability would be
through media campaigns ahead of educational classes/courses, as typically every
profession group has more than a 40 % weighting in preference for media
campaigns. However, 37.5 % of housewives believe that commercial schemes
would be the most effective and influential form of communication. On the other
hand 45.5 % of retired consumers believe that educational classes/courses are the
most effective and influential form of communication. However, in both of these
professions media campaigns came in second place.

3.2 Perceptions and Attitudes

For this topic we shall present the results of question numbers; five, six, seven, eight
and nine as depicted.

3.2.1 Q.5-Perceived meaning of sustainability?

A staggering roughly 5 in 10 (52.1 %) Bradford consumers were not sure (24.4 %)

or gave the wrong answer (11.1 %) or indicated that sustainability meant nothing
(3.7 %) to them and a further 12.9 % of consumers failed to answer the question.
Shockingly only 2.2 % of consumers most accurately described sustainability
through economic, social and ecological dimensions, with a further 25.2 % of
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 137

Fig. 12 Q5. What does sustainability mean to you?

Fig. 13 Q5. What does sustainability mean to you?

consumers adequately defining sustainability through long term responsibility

towards managing the environment (Figs. 12 and 13).

Socio-demographic considerations

Consumers in the £30,000–£45,000 income bracket indicate a lower overall misun-

derstanding of sustainability at 28.5 % which is lower than the lowest and highest
income groups. The < £15,000 income group indicates a total misunderstanding of
138 Z. Hussain and J. Singh

Fig. 14 Q6. How important are the following aspects when making a decision on which products
to buy?

43.5 %. The > £60,000 income group indicated a total misunderstanding of

38.1 %. Surprisingly, consumers whom have a university degree perceive a better
understanding of sustainability at 69.9 % (4.8 % of consumers gave the correct
definition plus 64.3 % of consumers gave a reasonable definition) than compared
with those with no university degree at 53.8 % (1.1 % of consumers gave the correct
definition plus 52.7 % of consumers gave a reasonable definition).

3.2.2 Q.6-Perceived Importance of Aspects When Buying Products

As can be seen from Fig. 14 quality is in number one position of importance closely
followed by price in position number two, then availability in third position and
lastly comes sustainability. This diagram is representative of the correct modal
positions of each of the aspects. A total of seven consumers did not answer this
question.

Socio-demographic Considerations

The > £60,000 income group indicates that the price aspect is of no concern which
is why only 14.3 % of consumers regard price as being the most important aspect,
which is considerably less than the average of 42.4 % consumers of the other
income groups. The 18–28 and 29–39 age groups gave less importance to the
sustainability aspect than the 40–50, 51–61 and 62+ age groups whom at least
gave consideration to sustainability in first position ranging in-between 13 % and
15 %. Interestingly, 48.7 % of consumers with a university degree and 55.1 % of
consumers with no university degree place sustainability in fourth place.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 139

3.2.3 Q.7-Attitudes Towards Low Environmental Impact Products and

Services

Overwhelmingly 44.8 % of consumers answered that they would give their loyalty
to a company that was offering products and services with a low environmental
impact. However 2 in 10 (20.8 %) Bradford consumers indicated that their loyalty
would not be won and a further 34.4 % of consumers were not sure as to whether
they would become loyal to a company offering products and services with a low
environmental impact. This ultimately leaves an indecisive result as a considerably
large amount of consumers whom indicated not sure will be basing their decision
on an external variable such as price, quality and availability. Only one respondent
did not answer.

Socio-demographic Considerations

The age group 18–28 indicates a perceived decrease in loyalty at 36.4 % towards
companies whom provide products and services that have low environmental
impact than compared with all of the other age groups whose average yes to loyalty
is 48 %. The most decisive age group is 51–61 in which a staggering 61.3 % of
consumers said yes in giving their loyalty to a company offering products and
services with a low environmental impact.

3.2.4 Q.8-Is Sustainability Being Exploited as a Marketing Tool?

A large proportion of consumers at 5 in 10 (50.6 %) answered yes that they do

believe that companies are exploiting sustainability as a marketing tool. A small
minority of 14.3 % of consumers indicated no in that they do not believe that
sustainability is being exploited as a marketing tool, with a further 35.1 % of
consumers answering that they are not sure. Only one respondent did not answer.

Socio-demographic Considerations

Consumers whom have a university degree depict a slightly more sceptical attitude
towards the actions of a company as 54.8 % answered yes in comparison to the
49.1 % of consumers with no university degree. Further to this, 7.1 % of consumers
with a university degree answered no, compared to 16.4 % of consumers with no
university degree.
140 Z. Hussain and J. Singh

Fig. 15 Q9. Do you believe more effort should be made to promote and advance sustainability?

3.2.5 Q.9-Should more Effort be made to Promote Sustainability?

Roughly 4 in 10 (39.2 %) Bradford consumers indicated that they are either not sure
(35.9 %) or no (3.3 %) to whether more effort should be made to promote and
advance sustainability. However, positively a larger proportion of consumers at 6 in
10 (61 %) people believed that yes more effort should be made. Only two
consumers did not answer.
As can be seen in Fig. 15, the most popular way in which consumers believe that
sustainability should be promoted and advanced is through creating a better
understanding (13 %) or through increasing awareness (12 %). This result is
further cemented through further support by 6 % of consumers whom believe that
both increasing awareness and creating a better understanding is necessary,
leading to a combined support of 31 %.

Socio-demographic Considerations

The interesting fact however is that 40–50 has a higher 58.8 % response and the
51–61 has an even higher response of 70 % stating yes. Looking at professions/
industries, unemployed consumers and housewives indicate a much lower degree of
support to advance sustainability with just 25 % answering yes compared to 72 % of
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 141

Fig. 16 Q10. How crucial do you think it is for companies to report and communicate their
environmental performance?

business consumers. Consumers placed in either the £45,000–£60,000

or > £60,000 groups generally indicate a greater degree of support for advancing
and supporting sustainability. The £45,000–£60,000 group indicates 83.3 %
answered yes and the > £60,000 group indicates that 78.2 % answered yes. This
in comparison to the < £15,000 group in which 56 % of consumers answered yes,
indicates that the highest income groups that are bordering on upper-middle class
society and high class society, show a greater degree of support in believing that
more effort should be made to promote and advance sustainability. 78.6 % of
consumers with a university degree answered yes, compared to only 53.2 % of
consumers with no university degree. 43.1 % of consumers with no university
degree answered that they were not sure.

3.3 Communications

For this topic we shall present the results of question numbers; ten, eleven and
twelve.

3.3.1 Q.10-Communication and Reporting of Environmental

Performance?

Roughly 9 in 10 (87.7 %) Bradford consumers believe that it is either very

important (48.4 %) or important (39.4 %) for companies to report and communicate
their environmental performance (Fig. 16).
142 Z. Hussain and J. Singh

Socio-demographic Considerations

The 62+ age group has indicated at 18.8 % the highest support out of any of the
groups for answering that there is no need for companies to report and communicate
their environmental performance. However 11.1 % of consumers in the 18–28 age
group answered that it is not so important for companies to report and communicate
their environmental performance, which is the highest proportion for any age
group. Interestingly consumers whom have a university degree showed a greater
degree of support for companies to report and communicate their environmental
performance with 57.1 % answering that it is very important and only 2.4 %
indicating that there is no need. Comparing this to consumers with no university
degree, 45 % indicated it is very important and 7.2 % answered that there is no
need.

3.3.2 Q.11-Inspiration/Encouragement to Participate in Sustainable

Practices?

A staggering 7 in 10 (68.2 %) Bradford consumers answered that they have not been
inspired or encouraged to participate in sustainable practices or initiatives, with 3 in
10 (31.8 %) people said that they yes they had been influenced or encouraged to
participate in sustainable practices or initiatives. Only one consumer did not
answer.

Socio-demographic Considerations

The age group with the highest proportion of consumers at 79.5 % whom indicated
that no they have never been encourage or inspired to participate in sustainable
practices is the 18–28 age group. This is then closely followed by the 29–39 age
group with 71.4 % and then by the 62+ age group with 68.8 %. Interestingly,
through analysing postal codes as depicted in Fig. 17, consumers whom live in
postcode areas BD3 (11.1 %) and BD 4 (14.3 %) indicate a very low degree of
answering yes with an average response to yes of 12.7 %. However 30.8 % of
consumers living in postal code area BD9 responded answering yes, with an
increased amount of consumers at roughly 4 in 10 (39.3 %) people in postal code
area BD15 answering yes.
Eight in ten Bradford consumers in the < £15,000 income group have indicated
that no that they have never been inspired/encouraged to participate in sustainable
practices or initiatives, the highest rate out of any of the income groups. Interest-
ingly, 52.4 % of consumers whom have obtained a university degree answered no, a
much lower figure than compared with 73.6 % of consumers whom had no
university degree.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 143

Fig. 17 Q11. Have you ever been inspired/encouraged to get involved in sustainable practices or
initiatives?

3.3.3 Q.12-Current Sustainability Practices/Initiatives

33.3 % of Bradford consumers indicated that they did nothing in terms of

participating in any sustainability practices or initiatives. The most commonly
occurring activity with 43.7 % of consumers participating is recycling ahead of
the second most popular activity with only 7.9 % of consumers is Energy saving
equipment/technologies/insulation and then with 5.6 % of consumers is actively
seeking to buying sustainable products. A staggering 29 people failed to answer this
question, an apparent anomaly in responses received may be because these
consumers simply may not be involved in any such sustainable activities and
therefore chose not to answer the question.
As can be seen in Fig. 18, other activities that consumers are involved include;
3.2 % of consumers are a member of a sustainability committee/organization, 2.4 %
have adopted and follow ISO14001/9001 standards at work, 1.6 % volunteer
towards community work and a further 1.6 % actively seek to re-use materials as
much as possible in every aspect of daily life and 0.8 % of the sample population
have made themselves aware of COSHH regulations at work.

Socio-demographic Considerations

The results show that 3 in 10 (30.3 %) male consumers currently are involved in no
sustainability practices or initiatives, which is slightly better than compared with
approximately 4 in 10 (38 %) female consumers whom answered no. Interestingly,
44.1 % of consumers in the 18–28 age group indicated that they are currently
involved in no sustainability practices or initiatives which is the highest amongst
the age groups, as this gradually seems to improve as the age increases up until the
point that the 51–61 age group has 32.1 % consumers that said they do nothing and
144 Z. Hussain and J. Singh

Fig. 18 Q12. What sustainability practices or initiatives are you currently involved in?

Fig. 19 Q12. What sustainability practices or initiatives are you currently involved in?

surprisingly 0 % of consumers in the 62+ group answered that they did nothing, as a
large majority of these consumers at 83.3 % were involved in recycling.
Looking at household income as seen in Fig. 19, essentially what has been
revealed is that the lower the income group is, the higher the rate is of consumers
whom do nothing in terms of sustainability practices or initiatives and therefore the
lower the rate of consumers whom are consistent with yes in that they are involved
in some sort or type of sustainability practice or initiative. As an incredible 55.6 %
of consumers in the < £15,000 group, 30.6 % of consumers in the
£15,000–£30,000, 30 % of consumers in the £30,000–£45,000 group, 25 % of
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 145

Fig. 20 Q13. Do you think that being part of a community will help to progress sustainability
more effectively than on an individual basis?

consumers in the £45,000–£60,000 and 21.1 % of consumers in the > £60,000

group indicated that they did nothing.
Finally, a greater degree of consumers with a university degree exhibited that
they were involved in some type or form of sustainability practice or initiative as
only 25.7 % of these consumers indicated that they did nothing compared to 36.3 %
of consumers who have no university degree.

3.4 Community

For this topic we shall present the results of question numbers; thirteen, fourteen
and fifteen.

3.4.1 Q.13-Would Being Part of a Community Benefit Sustainability?

Positively a large majority of consumers at 64.5 % indicated that yes being part of a
community will help to progress sustainability more effectively than on an individ-
ual basis. However, a small minority of consumers at 16.1 % answered that no they
believe it will make to no effect, and further to this roughly 2 in 10 (19.4 %)
Bradford consumers indicated that they were not sure. The results are illustrated in
Fig. 20.
Again a number of consumers have indicated that they are not sure which may
imply that other external factors are influencing the decision of consumers, and
such factors may be like the availability of time and the willingness of individuals to
collectively act as a community in order to make a positive effect.
146 Z. Hussain and J. Singh

Socio-demographic Considerations

Approximately 6 in 10 Bradford consumers in both the age groups of 18–28 and

29–39 answered that yes being part of a community would help to progress
sustainability more effectively than on an individual basis. This however,
represents a lower degree of consumers answering yes compared to all the other
age groups, as for example the 40–50 group has 73.5 % consumers answering yes
and 64.5 % of consumers in the 51–61 group answering yes.
Looking at professions/industries, the results indicate that 37.5 % of consumers
in both the housewives and unemployed status indicated that no being part of a
community will not help to progress sustainability more effectively than on an
individual basis. Interestingly however, again a further 37.5 % of consumers in both
the housewives and unemployed statuses indicated that yes being part of a commu-
nity would be more beneficial. However this indicated that these groups have the
highest degree of consumers whom answered no and the lowest degree of
consumers whom answered yes. Looking at annual household incomes, the results
indicated that consumers whom were placed in the lower to middle income groups
such as < £15,000, £15,000–£30,000 and £30,000–£45,000 had a higher degree of
consumers at an average of 67.73 % indicating that yes being part of a community
would help to progress sustainability more effectively than on an individual basis
compared to the lower average of 56.05 % of consumers in the £45,000–£60,000
and > £60,000 income groups that indicated yes.

3.4.2 Q.14-What/Who Is Associated as Being the Main Community?

Overwhelmingly 65.2 % of Bradford consumers answered that they believe the

locality in which you live is what they associate as being their main community.
Narrowly coming into second place with 13.5 % of consumers vote is a particular
group of people closely followed by your place of work with 12.3 % of consumers
in third place. A minority of consumers at 6.5 % indicated that your place of
worship was what they associate as their main community and lastly 2.6 % of
consumers answered your place of education. Quintessentially, 0 % of consumers
indicated that they associated their main community as being a political institution,
possibly hinting a strong consumer discontent and dissociation with politicians and
political activities/policies.

Socio-demographic Considerations

Interestingly a greater degree of consumers that reside in the postcode areas of BD3
and BD4 indicated that they associate their main community as being your place of
work with 33.3 % of consumers in BD3 and 42.9 % of consumers in BD4 which
leads to an average 38.1 % of consumers. These proportions of consumer votes are
equally the same for both of these postcodes for choosing the locality in which you
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 147

Fig. 21 Q14. What/who would you associate your main community as being?

live, which therefore exhibits the lowest percentages of support for this option than
any other postcode area. Further to this, the postcode area of BD9 indicated that a
greater degree of consumers at 61.5 % answered that their main community is the
locality in which you live. However the postcode area of BD15 has an even higher
degree of consumers at 74.2 % answering that they associate their main community
as being the locality in which you live. This apparent sliding scale of associations
based on postcode areas is depicted in Fig. 21.
Uniquely the results have indicated a correlation between the level of household
income and the choice made by consumers to the association of their main commu-
nity. It can be seen that as the income level groups increase in value, the degree of
consumers whom associate the locality in which you live as their main community
begins to decrease on a continuous basis as shown in Fig. 22.

3.4.3 Q.15-Willingness of Consumers to Participate in Sustainable

Practices as a Community

Approximately 46.5 % of Bradford consumers indicated that they were either very
willing (11.6 %) or willing (34.9 %) to participate in sustainability practices as a
community. However, roughly 4 in 10 (38.7 %) consumers indicated that maybe
they may join in sustainable practices as a community, thus suggesting that again
consumers are being influenced by external factors such as the availability of time
and taking consideration of financial constraints as also previously identified in
question number 13. The remaining 14.8 % of consumers answered that they are not
willing to participate in any sustainable practices as a community.
148 Z. Hussain and J. Singh

Fig. 22 Q14. What/who would you associate your main community as being?

Socio-demographic Considerations

Interestingly the results indicated that a greater majority of females at 18.3 %

indicated that they would be not willing to participate in sustainability practices
as a community compared to 11.6 % of males. Looking at age groups, only 6.2 % of
consumers in the 62+ group indicated that they would be very willing and only
25 % of consumers said that they would be willing to participate in sustainability
practices as a community, the lowest proportions of consumers for these options out
of all the age groups. Thus, 37.5 % of consumers in the 62+ age group answered
that they would be not willing to participate in sustainable practices as a commu-
nity, the highest proportion out of any age group again.
Looking at annual household incomes, the results indicate a strong correlation
between the level of household income and the willingness of consumers to
participate in sustainability practices as a community, as is depicted in Fig. 22.
The tendency is that the lower the income group level, the lower is the willingness
of consumers to participate in sustainability practices as a community. The
< £15,000 income group has a combined willingness of 34.6 %, compared to
the £15,000–£30,000 group which has a combined willingness of 48.8 %, the
£30,000–£45,000 group has a combined willingness of 52.1 % and the
£45,000–£60,000 group has a combined willingness of 66.7 %, but the > £60,000
group has a slightly lower combined willingness of 60.8 %. This slump at the end
may be due to lack of time for high earning professionals and families whom may
have many professional responsibilities which do not allow the slightest of
flexibilities than compared with domestic responsibilities. The results further indi-
cate that consumers whom have a university degree have a greater tendency to have
a greater combined willingness at 71.4 % compared with the 38.7 % combined
willingness of consumers whom have no university degree.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 149

3.5 Public Policies

For this topic we shall present the results of question numbers; sixteen, seventeen
and eighteen.

3.5.1 Q.16-Consumer Confidence in Politicians

Astonishingly approximately 9 out of 10 (87.1 %) Bradford consumers indicated

that no, they do not trust politicians to act in the best interest of the environment
when setting policies relating to sustainability. The remaining minority of
consumers at 12.9 % indicated yes they do trust politicians. This result reinforces
the assumptions made in question number 14, as this proves that a very large
majority of Bradford consumers have indicated a strong discontent and dissociation
with politicians and political activities/policies, due to a simple loss of trust which
has resulted in a lack of confidence.

Socio-demographic Considerations

There are not many significant variations or correlations that can be presented seen
as though the result of this question is so one-sided. However, a higher degree of
male consumers at 89.5 % indicated that no, they do not trust politicians to act in the
best interest of the environment when setting policies compared to 83.3 % of female
consumers. Interestingly, by age groups the highest number of consumers whom
indicated yes they do trust politicians is the 18–28 age group with roughly 2 in
10 (22.2 %) consumers indicating this and in second place is the 29–29 age group
with 14.3 % of consumers indicating yes. Looking at household income groups,
the < £15,000 group has the lowest degree of consumers whom trust politicians as
only 7.7 % indicated that yes they trust politicians compared to the highest of only
16.7 % of consumers in the £45,000–£60,000 group.

3.5.2 Q.17-Ways in Which a Real Change Can Be Made

Collectively 54.4 % of consumers indicated that either education (17.6 %) or media

(16.8 %) or both education & media (20 %) was the best way to make a real change
towards promoting sustainability. However 17.6 % of the sample population
indicated that they were not sure as to how a real change can be made. A further
8 % of consumers believed that the best way to make a real change was through
collective action by which every consumer was part of a community that collec-
tively looked to promote sustainability, as these consumers believed that the
collective knowledge and force of consumers in a community would be the best
way. In addition to this 5.6 % of consumers indicated that a pro-active attitude was
150 Z. Hussain and J. Singh

Fig. 23 Q17. How do you think a real change can be made towards promoting sustainability?

required from consumers, companies and the government in order to create positive
momentum towards making a real change. Another 5.6 % of consumers however
answered that taking partial control from the politicians was the best way to make a
real change towards promoting sustainability (Fig. 23).
Other slightly more harsher options that consumers suggested included 3.2 % of
consumers saying that everyone should be held accountable and fines should be
introduced for non-conformers, a further 1.6 % of consumers suggested that the best
way to make a real change would be to introduce legislations/standards and another
1.6 % consumers suggested to limit growth of the population and a very small
minority of consumers at 0.8 % indicated that nothing can be done in their view.
Other minority motions included 0.8 % of consumers indicating that there should be
less profit orientated organisations and less selfishness and a further 0.8 % of
consumers indicated that by making sustainable products affordable a real change
will be made towards promoting sustainability. Surprisingly nearly 2 in 10 (19.4 %)
Bradford consumers failed to answer this question by leaving it blank, which may
suggest that the consumers may not be sure as to how a real change can be made
towards promoting sustainability.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 151

Fig. 24 Q18. Should sustainability regulations be applied to businesses?

Socio-demographic Considerations

Looking at age groups, 48.5 % of consumers in the 18–28 group indicated that the
best way to make a real change towards promoting sustainability was through
education (10.3 %) or media (17.9 %) or education & media (10.3 %). However
surprisingly this is one of the lowest levels of support for such options compared
with the other age groups whom have a combined average of 61.48 % of consumers
indicating that either education or media or education & media are the best options
in their view. Looking at annual household income groups, the results indicate that
30 % of consumers in the < £15,000 group indicated education as the sole option
to make a real change towards promoting sustainability, and this proves to be the
highest percentage of support for solely education out of any of the income groups.
Similarly, 20.9 % of consumers with no university degree indicated that solely
education was the best way to make a real change towards promoting sustainability.
This proves to be a higher degree of support for this option as only 8.1 % of
consumers with a university degree indicated that education solely was their choice.

3.5.3 Q.18-Should Sustainability Regulations Be Applied to Businesses?

Approximately 7 in 10 (70.3 %) Bradford consumers indicated that yes

sustainability regulations should be applied to businesses. Another approximately
2 in 10 (19.4 %) consumers indicated that they were not sure as to whether
sustainability rules should be applied to businesses with the remaining minority
of consumers at 10.3 % answered no. The results are illustrated in Fig. 24.
152 Z. Hussain and J. Singh

Socio-demographic Considerations

Interestingly, as can be seen in Fig. 24 the results portray that the general tendency
is that the lower the income is then generally the level of support decreases for
consumers answering yes in that sustainability regulations should be applied to
businesses. The support gradually rises from 61.5 % of consumers indicating yes in
the < £15,000 income group to a peak of 83.3 % in the £45,000–£60,000 income
group and then slightly dips of to 78.3 % in the > £60,000 income group. Approxi-
mately a staggering 9 in 10 (90.5 %) Bradford consumers with a university degree
indicated that yes sustainability regulations should be applied to businesses which is
much higher in comparison to 63.1 % of consumers with no university degree
saying yes.

3.6 Rewards and Recognition

For this topic we shall present the results of question number nineteen.

3.6.1 Q.19-Likeliness of Increased Engagement in Sustainability if

Support/Guidance/Education is Available?

62.6 % of consumers answered that yes they would be more likely to engage in
sustainability if they received support/guidance/education, with only 13.5 % of
consumers answering no and the remaining 23.9 % of consumers indicated that they
were not sure. A relatively high amount of consumers indicated not sure which
again may be influenced by external factors such availability of time or financial
constraints and willingness.

Socio-demographic Considerations

Looking at profession/industry group, consumers whom are housewives indicated

the lowest degree of support within the group with only 12.5 % answering yes that
they would be more likely to engage in sustainability practices and instead had the
highest degree of consumer support at 62.5 % for indicating that they were not sure.
Approximately 7 in 10 (71.4 %) Bradford consumers with a university degree
indicated that yes they would be more likely to engage in sustainability practices
which is much more optimistic than the 59.5 % of consumers that answered yes and
had no university degree.
A Study of Consumer Attitudes and Behaviour Towards Sustainability in. . . 153

3.7 Publicity

For this topic we shall present the results of question number twenty.

3.7.1 Q.20-Will Increased Positive Publicity from the Media Influence

Consumers to Become more Sustainable?

63.9 % of consumers answered that yes they believe that increased positive public-
ity from the media would influence them to become more sustainable, with only
13.5 % of consumers answering no and the remaining 22.6 % of consumers
indicated that they were not sure. Again, a relatively high amount of consumers
indicated not sure which again may be influenced by external factors such as
availability of time or financial constraints and willingness.

Socio-demographic Considerations

There are not many significant variations or correlations that can be presented seen
as though the result of this question is one-sided and that the responses by
consumers seem to be spread comparatively equally amongst the groups.
However 76.2 % of consumers with a university degree indicated that yes they
believe that increased positive publicity from the media would make them more
sustainable with only 9.5 % of these consumers indicating they were not sure.
However, a lower proportion at 59.5 % of consumers with no university degree
indicated yes, with a higher proportion of consumers at 27 % answering that they
were not sure.

3.8 Recommendations

When companies are engineering products/services, they must primarily pay atten-
tion to the important aspect of price, so that they ensure that the sustainable offering
is affordable for consumers. They must also ensure that the quality is either at the
same level or higher than products/services that are not sustainable. To a certain
degree availability of sustainable products/services needs to be good as well in
order to ensure convenience and repeat purchases, and maintain consumer loyalty.
However the results indicated that commercial schemes seem to be less dominant
and influential than media campaigns, and therefore companies must harness the
power of media campaigns to promote sustainable products, thereby increasing
awareness and at the same time educating consumers.
Governments, businesses and individual citizens need to take action in order to create more
sustainable societies. EC (2009, p. 1)
154 Z. Hussain and J. Singh

A strong community ethos is required to excel the effectiveness of sustainability

especially for consumers in the lower level income groups, in a bid to encourage
increased participation and awareness. This will only be made possible if
consumers take the initiative to set up community movements and a way to boost
such activities would be the government providing grants for consumers to promote
sustainability through creating community associations.
An interesting question is that should private sustainability promoting bodies/
institutions similar to quangos have a deciding and influential hand in the formation
of sustainability regulations, so as to re-entrust some credibility into the minds of
consumers as to the actions taken to improve the state of the environment and
society rather than just focusing on the economy, which will be an exciting
dimension to explore in future research. But the BBC (2012) have published that
these quango organisations are on the decrease as the current coalition government
is on the initiative of cost cutting and as a result many of quangos have stopped
receiving funding.
Our quality of life, prosperity and economic growth depend on living within ecological
limits. EC (2009, p. 1)

Crucially it must be emphasised that positive publicity is required to renew

consumer interest in sustainability and convert the topic from being associated with
boredom as identified by Thøgersen (2003), thus increasing the awareness of
sustainability through media campaigns. Introducing sustainability education at
an early age is vital for future generations of consumers to have a better under-
standing of sustainability, but essentially this research has established that from the
consumer perspective sustainability is very much in the background.

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Setting Managing Sustainability Goals

David Schatsky

1 Environmental Goals Are a New Competitive Arena

Companies are increasingly being assessed not only by their environmental perfor-
mance but by the environmental goals they set. Stakeholders look for meaningful,
quantitative, aggressive environmental performance goals. Environmental goals are
becoming an arena of corporate competition and public declarations of goals can be
a way of staking out a position of leadership. UPS, for example, claims to be the
first company in its industry to issue a sustainability report and to publicize its goals
for business practices that protect the environment (UPS 2006). Companies use
goals to help them become leaders as well. Conagra Foods CEO Gary Rodkin
announced its sustainability goals in 2010 saying, “We’ve set these new transparent
sustainability goals to ensure we are a leader in continuously improving the way we
make food, and to continue to create more awareness for what others can do to
improve as well.” (Agence France 2010)

2 Environmental Goals Have Key Differences from Other

Corporate Goals

In many ways, environmental goals are not that different from any other corporate
goals. They provide focus. They are a statement of commitment. They provide a
target to manage to, a yardstick to assess performance, and serve as an indicator of
whether tactics are working or need revision. They can give stakeholders a common
view of where an enterprise is going that can help align and coordinate efforts,
making successful outcomes more likely.

D. Schatsky (*)
Green Research, New York, USA

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 157
DOI 10.1007/978-3-642-37018-2_7, © Springer-Verlag Berlin Heidelberg 2013
158 D. Schatsky

But while companies have disclosed financial, customer satisfaction or other

goals for a long time, many companies are relatively new to setting public environ-
mental goals (other than compliance goals). There are established measures of
financial performance that apply across industries yet appropriate environmental
goals can vary widely among industry sectors. All companies track financial data
but companies new to thinking about environmental performance may find they do
not have ready access to environmental data. They have to develop the capability of
measuring environmental performance before they can set environmental goals.

3 Many Factors Influence the Selection of Sustainability

Goals

At most companies, numerous factors influence the selection of sustainability goals

(Fig. 1). According to a recent Green Research survey of sustainability executives,
materiality is the most commonly cited major influence on sustainability goals.
Three-quarters of respondents said their company’s most significant environmental
impacts were a primary influence on the goals they had established. Alignment with
strategy is the second-most cited response. Although sustainability is an area of
increasingly important corporate competition, just 15 % of respondents cited
competitors as an influence on the sustainability goals they set. We believe this
understates competition as an influence. It comes up regularly in our conversations
with sustainability execs. Jane Madden, senior vice president, corporate social
responsibility and sustainability at Edelman, a major public relations firm, noted
that clients she advises about sustainability goals frequently ask about their
competitors. Though only 7 % of respondents to the survey cited the influence of
non-profits or government agencies as a main influence on their sustainability goals,
hundreds of companies have participated in the EPA Climate Leaders program,
embracing goals stipulated by that program. In the end, leading companies look at a
range of inputs in selecting sustainability goals, and this is appropriate.

4 Goals, Targets and Timelines

The effective expression of a goal must have three key aspects: the issue the goal is
dealing with; a quantitative target; and a timeline (Fig. 2). Examples of issues
include greenhouse gas emissions, water consumption and volume of packaging.
Quantitative targets may be absolute numbers, such as “150 million tons,” or
percentages, such as “a 50 % reduction.” The timeline is the year by which the
goal is to be achieved. Goals related to prior performance also need to specify a
“base year.” Below we look at how leading companies establish goals, targets and
timelines.
Setting Managing Sustainability Goals 159

Fig. 1 Factors that influence sustainability goals (Source: Green Research Sustainability Execu-
tive Survey (6/11), n ¼ 27)

Fig. 2 Anatomy of a sustainability goal

5 Consult Widely and Create a Coherent Framework

for Goal Setting

Green Research recommends that companies consult with a broad set of

stakeholders to determine the areas in which to define sustainability goals. When
Kraft Foods decided to step up its focus on sustainability in 2006, it conducted
background research, undertook competitive analysis and consulted with environ-
mental NGOs and internal experts to identify six main areas that matter most to the
company and where they felt they could make the biggest impact. The areas are
agricultural commodities; energy; packaging; water; waste; and transportation and
distribution. The company encapsulated those areas into a framework for setting
sustainability goals that it calls the “sustainability wheel” (Fig. 3). All of the
company’s sustainability goals relate to some section of the wheel.
Kraft decided initially to set goals in areas over which it had direct control over
and for which it already had some data. These were water consumption, waste
production, packaging, energy use. Areas dependent on the actions of others or for
which data gathering still needed to be established would come later. Green
Research considers this approach a best practice.
Services firms will arrive at very different goals than manufacturers. Jones Lang
LaSalle, the big real estate services firm, recognized that its customers’
160 D. Schatsky

Fig. 3 Kraft Foods’

sustainability wheel
(Source: Kraft Foods 2010
Sustainability Report)

environmental impacts dwarfed the company’s own and that it had influence over
those impacts through its management practices. So its primary sustainability goal
is helping its clients reduce their carbon emissions.

6 Reducing Greenhouse Gas Emissions Is the Most Popular

Goal

Given the policy and popular focus on climate change, it’s unsurprising that the
most common area for sustainability goals is reducing greenhouse gas emissions
(Fig. 4). Every one of the respondents to our survey has such a goal on the books,
though some have not gone public with their goal. It is conventional wisdom that,
after greenhouse gas emissions, water is emerging as the next big focal point of
sustainability strategy. Judging simply by the impact areas listed in our survey, the
story is a bit different. After setting GHG emissions reduction goals, companies
tend to establish a suite of goals, including water, solid waste and recycling, which
appear with similar frequency on the list.
It’s worth noting that twice as many respondents to our survey indicate that they
have internal goals relating to hazardous materials than have public goals regarding
this area. In our experience, companies set an internal goal and refrain from
publicizing it for a variety of reasons:
• Belief that it is not very relevant to external stakeholders
• It is not as material as other public goals
• Lack of good tracking systems
• Lack of confidence in their ability to meet their goals, sometimes because
Setting Managing Sustainability Goals 161

Fig. 4 The most common sustainability goals (Source: Green Research Sustainability Executive
Survey (6/11), n ¼ 29)

• Dependence on third parties to achieve a goal

It is likely that some combination of these factors is the reason for this disparity.

7 “Stretch” Goals Most Common

Most companies characterize at least some of their sustainability goals as “stretch

goals” – they are challenging but probably achievable – or “realistic” – meaning
they are based on an assessment of the current performance and what the company
believes is achievable (Fig. 5). A target is the quantitative dimension of a goal and
can mean the difference between a stretch goal and a “slam dunk.”
Targets for realistic or stretch goals are best set by means of a bottom-up process.
The first step in this process is to baseline current performance by calculating a
carbon footprint, waste production or water consumption, for example. Companies
then look at what projects are already planned that may impact performance (either
positively, such as energy efficiency retrofits, or negatively, such as expansion
plans) and determine what additional initiatives they can take would improve
performance. In some cases, capital investments are assessed and the return on
investment of those investments needs to be modeled. A company’s ability to
commit to investments or projects that impact a goal is a key influence over what
targets can it sets. Global financial services firm Barclays told us, for instance, that
limits on what can physically be accomplished in a given time frame can sometimes
influence targets more than capital constraints. Installing submeters in bank
branches, for example, can only be done outside of business hours.
162 D. Schatsky

Fig. 5 How aggressive companies’ goals are (Source: Green Research Sustainability Executive
Survey (6/11), n ¼ 28)

Suppliers may present an opportunity for improving environmental perfor-

mance. Dell tells us, for instance, that it consults its suppliers’ product roadmaps
when formulating product sustainability goals. Macro trends may also play a part in
target setting. Telefónica, the Spain-based telecommunications company, modeled
macro energy consumption trends in each of its major geographical market as part
of its goal-setting process.

8 Set Targets by Combining Bottom-Up and Top-Down

Analysis

A bottom-up analysis is rarely sufficient for determining appropriate targets

(Fig. 6). Often targets originate at the top. Some companies look at the targets
other companies have announced. Some consult NGOs, industry bodies or govern-
ment agencies for guidelines on appropriate environmental impact reduction
targets. Cummins, for instance, took on a goal from the EPA Climate Leaders
program: a 25 % reduction in carbon intensity by 2010 compared to 2005. (The
company achieved a 28 % reduction). And it is a charter member of the newly
launched Save Energy Now LEADER program with the U.S. Department of
Energy, pledging to reduce energy intensity by 25% by 2015.
A quarter of respondents to our survey have “aspirational” sustainability goals,
top-down goals intended to inspire and motivate. A classic formulation of an
aspirational goal is one by InterfaceFLOR, which has pledged to “Eliminate any
negative impact the company may have on the environment by 2020.” Aspirational
goals can bring excitement to a sustainability strategy, but can engender grumbling
from mid-level executives if they are held accountable for achieving them.
Some companies have a mix of realistic, stretch and aspirational targets.
Fujitsu’s targets for reducing greenhouse gas emissions represent such a mix. Its
Setting Managing Sustainability Goals 163

Fig. 6 Bottom-up and Other compa-

top-down analysis Top nies
Down NGOs
Government
programs
Industry bodies
Macro trends

Baseline own
Bottom performance
Up Existing
projects
New projects
Suppliers

“Green Policy 2020” is a commitment to reduce CO2 emissions in Japan by

30 million tons by 2020 with an interim target of a 15 million ton reduction by
2012. The 30 million ton target is a top-down goal, while the 15 million ton target
was developed through bottom-up analysis. Product energy efficiency is supposed
to deliver a three million ton reduction, for example, with the balance achieved
through various solutions including more efficient data centers. The 15 million ton
goal was allocated between the regional head of sustainability, the regional head of
data centers, and the company’s environment strategy group in Japan.
Kraft Foods told us it set its goals based on bottom-up and top-down factors. The
company looked at others in its peer groups to see what commitments they were
making; it looked at its past performance; expected gains from projects already on
the books; and potential gains from new projects. In the case of its goal of reducing
packaging volume by 150 million pounds by 2011, about 25–30 % of that reduction
would have been achieved by projects already planned. To achieve the full goal, the
company needed to do a lot more. In total, it took some 200 projects together to
meet the target. The company ultimately exceeded the target – ahead of schedule,
booking a 175 million pound reduction in packaging by 2009.
To guide the target-setting process, Sustainability executives should judge their
company’s track record and culture and answer the following questions:
• Does the company have a history of setting and achieving challenging goals?
• Does the company have a culture that prizes excellence in operations?
• Can you identify the initiatives and investments that have a high likelihood of
helping to achieve a substantial share of the target?

9 Set Targets Three to Five Years Out

Green Research believes that sustainability targets should be set for a period of 3–5
years. Shorter than that and the overhead of frequently reviewing and resetting
targets can become burdensome. Longer than that and the individuals accountable
164 D. Schatsky

Fig. 7 Frequency with which goals are reviewed and revised (Source: Green Research
Sustainability Executive Survey (6/11), n ¼ 29)

Fig. 8 Plans, goals and Time Horizon Nature of Target

visions
Annual Operating Plan
Three to Five Years Goals
Ten Years or More Aspiration

for the goals may have moved onto new jobs before their success or failure is
reckoned. This is the philosophy followed by Kraft Foods, which established 6-year
targets in its first round of public sustainability goals and 5-year targets for its cycle
starting 2011. A majority of the respondents to our survey said their company
reviewed and revised environmental goals at least annually (Fig. 7). But public
goals tend to change much less frequently than that (Fig. 8).

10 Experts Should Set Goals; Operating Execs Should Own

Them

In dozens of interviews with sustainability executives, Green Research has

identified what it believes to be an effective process for defining and committing
to sustainability goals (Fig. 9). While the specifics may vary from company to
company, an effective sustainability goals process general includes these elements:
• CEO-level support for the sustainability strategy
• Functional experts in areas like facilities, energy, packaging and so forth work to
propose specific goals and plans for meeting them
• Operating executives review, review and then take ownership of those plans
• The CEO and/or the board approves the plans and holds operating executives
accountable for executing them.
Setting Managing Sustainability Goals 165

Fig. 9 Levels of
management that approve
goals (Source: Green
Research Sustainability
Executive Survey (6/11),
n ¼ 29)

Flooring manufacturer Shaw Industries has a “Growth & Sustainability Council”

that approves sustainability goals. It’s comprised of senior leadership from all
business and functional areas of the organization. The Council convenes quarterly
to assess progress, set goals (or ratify those proposed at a lower level) and ensures
the alignment of sustainability strategy with the company’s long- and short-term
corporate objectives.
At Barclays, the head of sustainability and the head of corporate real estate
jointly present a sustainability plan including carbon offset commitments to the
Group Operating Committee (GOC), which is comprised of chief operating officers
of the business units. Once the GOC approves capital requirements for the mitiga-
tion plan it goes to the group chief executive officers, who can ask for changes.
Then it goes to group board for final approval.
Executive commitment is critical for ensuring operating executives are held
accountable for execution plans and achieving goals. And coordinating
sustainability strategy centrally can ensure strategic alignment and synergies and
foster better communication. As one executive at a manufacturing company told us,
“We have a lot of pockets doing environmental work that report up to various vice
presidents. There’s a lot of good work going on but it’s siloed and not coordinated.
How much more we could do if there were central goals!”

11 Senior Management Should Review Progress Quarterly

Leading companies manage sustainability goals like any other corporate goal: with a
structured process for setting targets, clear accountability, periodic review, and
appropriate incentives for performance. Progress toward sustainability goals, like
progress on any other important goal, should be reviewed at least quarterly by senior
management, something that a majority of the respondents to our survey say happens
at their company. But some 40 % of respondents say sustainability goals are reported
166 D. Schatsky

Fig. 10 Progress reporting frequency (Source: Green Research Sustainability Executive Survey
(6/11), n ¼ 29)

to senior management less frequently than that (Fig. 10). Telefónica reports on
energy consumption every 6 months. The company says collecting consumption
data is still a slow process: smart meters are in use in only a few of their geographies;
elsewhere they rely on standard invoicing processes to obtain consumption data. The
company hopes to move to a monthly reporting process when feasible. Green
Research believes quarterly reporting reduces performance risk.

12 Ensure that Specific Individuals Are Accountable for

Sustainability Results

It’s an axiom of management that to achieve a goal, someone must be accountable

for it. If everyone or no one is accountable for achieving a goal, there’s a high
likelihood that the goal will get neglected. Green Research sees a wide disparity in
how companies address accountability for sustainability goals. We know of one
major telecommunication equipment supplier with an ambitious corporate carbon
reduction goal but no internal accountability for that goal. The company’s chief
sustainability officer struggles to get buy-in to goals from department heads who
have no accountability for meeting them. “Those are not my goals,” responds the
head of the IT department. “My goals for the year are availability, uptime, number
of applications supported, and budget. And I don’t pay for my own electricity.”
“What’s missing,” says the CSO, “is sustainability in the middle. The CEO is
committed; the green teams are committed. But the guys in the middle won’t
until they have the goals and objectives do it.”
Kraft Foods follows the best practice of tracing every sustainability goal to a
specific executive owner. For example, its packaging goals are owned by the head
of research & development. Manufacturing goals (such as energy, water, waste and
Setting Managing Sustainability Goals 167

Fig. 11 Executives with compensation tied to environmental performance (Source: Green

Research Sustainability Executive survey (6/11), n ¼ 29)

cost) are owned by the head of operations. Where appropriate, global goals are
broken down to regional subgoals, for which regional executives are accountable.
Shaw Industries uses a management model known as RACI for setting goals.
RACI is an acronym that identifies the principal stakeholders in any decision, who
may be Responsible, Accountable, need to be Consulted, or need to be Informed.
The company tries to ensure that everyone on the RACI chart for a given goal is
present when the goal is discussed.

13 Tie Compensation to Achievement of Sustainability

Goals

To heighten commitment to environmental sustainability goals, companies should

incorporate them in executives’ performance appraisal process and compensation
packages. Nearly 70 % of respondents to our survey say that some or all execs at the
VP, SVP or EVP level are compensated in part based on the attainment of
environmental goals (Fig. 11). This relatively strong result is due, we believe, to
the fact that our respondents tend to be leaders in environmental sustainability. The
prevalence of sustainability-linked goals in companies generally is likely much
lower. Even among this group, it’s worth noting that lower levels in the manage-
ment hierarchy are more likely to have some compensation tied to environmental
goals than higher levels. Just 50 % of companies tie CEO compensation to environ-
mental goals, while nearly 80 % tie the comp of some managers or directors to such
goals. While CEOs shouldn’t necessarily be held accountable for every
168 D. Schatsky

Fig. 12 Fujitsu environmental programs (Source: 2010 Fujitsu Group Sustainability Report)

environmental goal, we believe that if a company has a serious sustainability

strategy, the CEO should bear some compensation risk for the major goals. We
recently heard from a chief sustainability officer who told of receiving a call from
the head of the company’s compensation committee. The topic: how had the CEO
performed relative to her sustainability goals? In this case, the chief sustainability
officer had influence over some of the CEO’s compensation.

14 Communicate Clearly, Simply and Consistently about

Sustainability Goals

Companies set sustainability goals not only to drive change but to communicate
with stakeholders inside and outside the company. The role of goals as a
communications vehicle should not be underestimated. Indeed, consultancy
SustainAbility measured a recent dramatic increase in the number of professional
sustainability watchers who perceive Unilever as a sustainability leader. It links
that increase to the company’s release of its Sustainable Living Plan in the fourth
quarter of 2010. Similarly, according to SustainAbility, perception of U.K. retailer
Marks & Spencer as a sustainability leader continued a sharp upward trend in 2007,
the year it release its Plan A. That improvement continues this day, following the
company’s release of revised and expanded goals in 2010.
Both of those companies exemplify the best practice of encapsulating an ambi-
tious program under a simple rubric with compelling themes: “Sustainable Living,”
and “Plan A” (because there is no Plan B).
Fujitsu Group’s message, by contrast, is complex (Fig. 12). Its numerous (and
worthy) sustainability initiatives are difficult to sum up because they are described
by various names with different timeframes:
Setting Managing Sustainability Goals 169

• Green Policy Innovation, FY2007-FY2012

• Fujitsu Group Environmental Protection Program (Stage VI), FY2010-FY2012
• Green Policy 2010
• Green Policy 2021
We would advise Fujitsu to work toward more streamlined messaging.

15 Go Public with Goals, or Have a Good Reason Not To

As we have seen, public sustainability goals can help drive results and communi-
cate with stakeholders. They are a tool for positioning and an arena for competition
as well. So shouldn’t every company declare public sustainability goals?
Probably. But some companies struggle with this. According to Edelman’s Jane
Madden, some clients are reluctant to publicize goals because they are afraid of
failing to achieve them. We believe this is a weak rationale. After all, public
companies rarely avoid giving financial guidance; indeed, they are expected
to. We believe such concerns reflect a relatively less mature management processes
and practices for sustainability goals – the prevalence of which was one of the
reasons we undertook to write this research.
We know of another company that has announced a greenhouse gas reductions
goal but no other goals, even though it says it has dozens of other internal
sustainability goals. The reason: the company is geographically diverse, and
operates with dramatically different infrastructures and conditions around the
globe. This is an unpersuasive justification as well. While regional variations
must be a factor in how goals are allocated, there is no inherent reason why those
goals can’t be aggregated and reported out.
We know of a company in a highly competitive industry that sets its
sustainability goals with the goals of its archrival in mind, and avoids publicizing
goals where possible to avoid setting off a sustainability arms race that might
pressure it to commit to more than it is ready for. Not such a laudable rationale
but understandable.
One good reason for not disclosing goals is a lack of credible data for measuring
performance. Telefónica, for instance, has internal waste reduction goals but
acknowledges it still possesses only spotty data in certain geographies. For now,
those goals remain internal or disclosed only under non-disclosure agreements.
Finally, the case of Apple is noteworthy. The famously innovative technology
product designer and marketer has been highly reluctant to disclose sustainability
goals and justified its opposition to creating a sustainability report on the grounds
that doing so would be redundant, time consuming and costly. Those objections
lack credibility to us. We speculate that the real explanation is that voluntarily
disclosing this kind of information is antithetical to the company’s culture of
secrecy, which has served it very well and is a pillar of its strategy. The company
says it would rather be judged by its results than its goals, which is fine. But it
170 D. Schatsky

remains dogged by negative attention that it could help mitigate by being more
transparent with sustainability goals. Green Research believes all companies must
define and communicate well-considered sustainability goals or else risk being seen
as aloof or out of touch.

References

Agence France Press (2010) ConAgra foods to reduce packaging, water, green-house gas and solid
waste by 2015. IndustryWeek. http://www.industryweek.com/articles/conagra_foods_to_reduce_
packaging_water_greenhouse_gas_and_solid_waste_by_2015_21491.aspx
UPS (2006) UPS sustainability report charts gains toward centennial goals. CSRWire. http://www.
csrwire.com/press_releases/24367-UPS-Sustainability-Report-Charts-Gains-toward-Centennial-
Goals
Environmental Management Systems:
Enabling Tools Towards Sustainability?

Luca Cagnazzo, Emanuele Raggi, and Paolo Carbone

1 Introduction

In recent years since the widespread adoption of the ISO 14001 international
standard and the continuous update of the European EMAS scheme, along with
the effects of many other environmental management schemes, environmental
management systems (EMSs) have gained increasing acceptance among
companies. In fact, the latest 2010 ISO survey reports that as many as 250,000
ISO 14001:2005 certificates have been issued in 155 countries (The ISO Survey of
certifications 2010).
The development of a basic environmental management system is based on
– An initial environmental analysis identifying the company status with respect to
the environment;
– The identification of an environmental policy, providing guidance and setting
company directions with respect to the environment;
– The determination of objectives, set coherently with the environmental policy;
– The installation of a management system (processes, responsibilities,
documents, data, . . .) supporting the achievement of identified objectives;
– The usage of feedback and control mechanisms, such as a system of corrective/
preventive actions, management reviews and internal/external audits.
The instantiation of an EMS in a company requires interpretation of
requirements and adaptation of the management system in relation to the applica-
tion constraints. As pointed out in Ghisellini and Thurston (2005) with respect to
the ISO 14001 EMS, the result is a management and not a performance standard,
because the continuous improvement requirement does not strictly imply reduction

L. Cagnazzo (*) • E. Raggi • P. Carbone

Department of Electronics and Information Engineering, University of Perugia,
Via G. Duranti, 06125 Perugia, Italy
e-mail: [email protected]; [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 171
DOI 10.1007/978-3-642-37018-2_8, © Springer-Verlag Berlin Heidelberg 2013
172 L. Cagnazzo et al.

in environmental impacts. This limit has partially been overcome by the latest
EMAS scheme. This is based on the ISO 14001 requirements but takes into account
additional elements that make it a more demanding EMS: public reporting, stricter
legal compliance verifications, performance improvements required also for the
environment and not only regarding the management system, make the achieve-
ment of EMAS registration more difficult, but assuring higher probability of
effectiveness in reducing environmental pollution. This was a design objective of
this EMS, according to Morrow and Rondinelli (2002).
The introduction of an EMS in a company generates modification in the
company’s organization and may be considered as a potential motivator for
addressing the broader topic of sustainability that encompass, in different
applications, business, environmental and social subjects. In fact according to
Steger (2000) the social dimension is missing completely in current EMSs, but
nevertheless “Environmental management systems are tools to better reconcile
corporate economic and ecological goals, but they cannot substitute politically set
standards for environmental protection.” At the same time tangible results have
been reported linking EMS with environmental improvements (Steger 2000). Also
the value of certification is considered in these processes (Steger 2000): “Certifica-
tion per se may not bring significant performance improvements. It can, however,
have important behavioral and managerial impacts that contribute to better envi-
ronmental performance.” Also the whole set of metastandards (e.g. ISO 14001,
ISO 26000) that allow general management practices to be standardized, become
guidance documents for sustainable development (Rondinellia and Vastagb 2000).
An interesting perspective on sustainability is proposed by MacDonald (2005), in
which sustainability objectives of an organization are managed to:
1. Eliminate its contribution to systematic increases in concentrations of substances
from the Earth’s crust,
2. Eliminate its contribution to systematic increases in concentrations of substances
produced by society,
3. Eliminate its contribution to systematic physical degradation of nature,
4. Eliminate its contribution to the undermining of humanity’s ability to meet its
needs worldwide.
ISO 14001 is seen as a technical tool on which to base the achievement of such
objectives (MacDonald 2005).
Owing to these motivations, the goal of this research is that of verifying if the
adoption of a structured EMS can be thought of as a tool enabling the company’s
path towards sustainable strategies and operations. This research question will be
answered by means of qualitative, quantitative and case study-based research
analyses.
Environmental Management Systems: Enabling Tools Towards Sustainability? 173

2 A Literature Analysis Comparison Between EMS

and Sustainability

2.1 Research Methodology

The research methodology adopted in this work is a systematic review of scientific

papers. A systematic review provides information about the effectiveness of
interventions by identifying, appraising, and summarizing the results of otherwise
unmanageable quantities of research (Light and Pillemer 1984; Mulrow 1994). The
use of a systematic review is justified since in the management field, the traditional
narrative literature reviews have been widely criticized for the lack of relevance due
to the use of personal and usually subjective as well as biased methodologies by
authors Fink (1998), Hart (1998).
To mitigate this gap, it has proposed to apply the specific principles of the
systematic review methodology usually used in medical sciences (Transfield et al.
2003). The main difference between a systematic review and a traditional narrative
review is that, contrary to the latter, the former uses a rigorous, replicable, scientific
and transparent process (Cook et al. 1997). Journals’ relevance for the literature
review are evaluated through one of the most accepted database, Web of Science,
and search engine named ISI Web Of Knowledge. Journals’ selection for the
current study has been pursued evaluating results provided by the research engine
and sorted by relevance in relation to the keywords selected by authors.
In order to make a comparison between the evolutions in the EMS and
Sustainability subjects and to find similarities and differences between them, this
research part has been conducted following two different approaches: a quantitative
research, that has been extended to all works suggested by the Web Of Science
database (such as articles, conference reviews, books and all other sources), and a
qualitative research, in which authors considered only empirical articles published
in scholarly journals and excluded non-empirical studies (conceptual works, quali-
tative studies, etc.) as well as those disseminated using a number of different media
(book, internet, etc.) (Becheich et al. 2006). This choice allowed authors to have a
better comparable body of research, which enhances the quality of the systematic
review results.
The authors extended the literature review by covering a period of 40 years, from
70s to 2011, which guaranteed a sufficient amount of articles to validate research
results. In the first part of this research, all the items have been involved for a
quantitative analysis. In the second part, the authors read the titles so as to firstly
exclude the main part of the body of papers evaluated as being not inherent the
purpose of this research. Secondly the authors excluded other papers after reading
the abstracts, which were irrelevant to the research goals. The remaining articles
have been entirely read, to exclude those, which were definitely evaluated as not
interesting for the literature analysis.
174 L. Cagnazzo et al.

2.2 A Quantitative Literature Analysis

This analysis has been performed in order to examine the literature regarding both
subjects related to EMSs and sustainability and to identify similarities or evidenced
correlations. The dataset used in this work was constructed using the ISI Web
of Knowledge database. The keywords used for the queries have been chosen with
the aim of covering all studies and works discussing from one side the EMS
implications, involving also the ISO 14001 and EMAS implementations, and the
Sustainability concept from the other side: such keywords are “EMS”, “Environ-
mental Management System”, “ISO 14001” and “EMAS” for the former (hereinaf-
ter for simplicity just “EMS”) and “Sustainability” for the latter, searched in the
main article topics (such as the title, abstract and keywords). These words have
been selected because of their relevance on the topics of interest. The research has
not initially been refined on specific research areas in order to involve all works
published in the last decades.
For the EMS research output, the resulted dataset contained 28,390 articles,
published in 8,327 sources. The majority of the sources are journals and conference
proceedings. In particular, the main types are classified as follows: articles
(20,039), proceedings papers (8,556), reviews (1,342), meeting abstracts (357)
and the remaining are editorial materials (340), news items (105), book reviews
(93), notes (86), letters (78), book chapters (45), corrections (8), reprints (6),
discussions (5), software reviews (3), biographical item (1), correction addition
(1), database review (1), hardware review (1), item about an individual (1), music
performance review (1), record review (1).
The 10 sources with the highest numbers of papers are: Journal of environmental
management (278), Environmental management (259), Prehospital emergency care
(239), Resuscitation (233), Journal of cleaner production (232), Annals of emer-
gency medicine (212), Water science and technology (206), Environmental
modelling software (189), Academic emergency medicine (181), Acta horticulturae
(181) as shown in Fig. 1.
Figure 1 suggests that the most active sources on the topic belong to the medical
and health sectors as well as the environmental management guidelines.
The same research has been performed for the “Sustainability” research topic
and the resulted dataset contained 36,861 articles, published in 7,976 sources. Also
in this case, the majority of the sources are journals and conference proceedings:
mainly articles (25,388), proceedings papers (9,643), reviews (1,758), editorial
materials (1,411) and book reviews (846). The 10 sources with the highest numbers
of papers are: Ecological economics (673), Journal of cleaner production (392), Wit
transactions on ecology and the environment (368), Agriculture ecosystems envi-
ronment (260), Forest ecology and management (257), Energy policy (255), Inter-
national journal of sustainable development and world ecology (247), Water
science and technology (234), Journal of environmental management (210), Journal
of sustainable agriculture (208) (Fig. 2).
Environmental Management Systems: Enabling Tools Towards Sustainability? 175

GENETICS
JOURNAL OF ENVIRONMENTAL QUALITY
NATO SCIENCE FOR PEACE AND SECURITY SERIES C ENVIRONMENTAL SECURITY
WASTE MANAGEMENT RESEARCH
SCIENCE OF THE TOTAL ENVIRONMENT
LECTURE NOTES IN COMPUTER SCIENCE
ENVIRONMENTAL MONITORING AND ASSESSMENT
ECOLOGICAL ECONOMICS
AGRICULTURAL SYSTEMS
RESOURCES CONSERVATION AND RECYCLING
WIT TRANSACTIONS ON ECOLOGY AND THE ENVIRONMENT
ECOLOGICAL MODELLING
WASTE MANAGEMENT
PROCEEDINGS OF THE SOCIETY OF PHOTO OPTICAL INSTRUMENTATION ENGINEERS SPIE
AGRICULTURE ECOSYSTEMS ENVIRONMENT
ACTA HORTICULTURAE
ACADEMIC EMERGENCY MEDICINE
ENVIRONMENTAL MODELLING SOFTWARE
WATER SCIENCE AND TECHNOLOGY
ANNALS OF EMERGENCY MEDICINE
JOURNAL OF CLEANER PRODUCTION
RESUSCITATION
PREHOSPITAL EMERGENCY CARE
ENVIRONMENTAL MANAGEMENT
JOURNAL OF ENVIRONMENTAL MANAGEMENT
0 50 100 150 200 250 300

Fig. 1 The most important publications on EMS with respect to number of appeared documents
(articles, letters, . . .)

ENERGY
ECOLOGY AND SOCIETY
MARINE POLICY
FORESTRY CHRONICLE
ABSTRACTS OF PAPERS OF THE AMERICAN CHEMICAL SOCIETY
ENVIRONMENTAL SCIENCE TECHNOLOGY
PROCEEDINGS OF THE NATIONAL ACADEMY OF SCIENCES OF THE UNITED STATES…
LANDSCAPE AND URBAN PLANNING
AGRICULTURAL SYSTEMS
RENEWABLE SUSTAINABLE ENERGY REVIEWS
ECOLOGICAL MODELLING
JOURNAL OF BUSINESS ETHICS
SUSTAINABLE DEVELOPMENT
ACTA HORTICULTURAE
ENVIRONMENTAL MANAGEMENT
JOURNAL OF SUSTAINABLE AGRICULTURE
JOURNAL OF ENVIRONMENTAL MANAGEMENT
WATER SCIENCE AND TECHNOLOGY
INTERNATIONAL JOURNAL OF SUSTAINABLE DEVELOPMENT AND WORLD ECOLOGY
ENERGY POLICY
FOREST ECOLOGY AND MANAGEMENT
AGRICULTURE ECOSYSTEMS ENVIRONMENT
WIT TRANSACTIONS ON ECOLOGY AND THE ENVIRONMENT
JOURNAL OF CLEANER PRODUCTION
ECOLOGICAL ECONOMICS

0 100 200 300 400 500 600 700 800

Fig. 2 The most important publications on Sustainability with respect to number of appeared
documents (articles, letters, . . .)

As evidenced in Fig. 2, the Sustainability concept has been investigated under

the environmental and business perspective: looking at the first 25 sources in fact,
they mainly discuss the Economy pillar of the sustainability, such as “Ecological
Economics” or “Journal of cleaner production” do, and the environmental
implications of sustainability, such as “Wit transactions on ecology and the envi-
ronment” and “Agriculture ecosystems environment”.
In order to better understand the dissimilarities between the EMS and
Sustainability literature, the most important 20 subject areas for EMS are illustrated
in Fig. 3.
Similarly for the literature on Sustainability, the most important 20 subject areas
are depicted in Fig. 4.
From the comparison of data in Figs. 3 and 4, it is immediately clear that in the
first six subject areas regarding both topics there are five common subject areas.
176 L. Cagnazzo et al.

MATERIALS SCIENCE
FORESTRY
TOXICOLOGY
OCEANOGRAPHY
CHEMISTRY
GENERAL INTERNAL MEDICINE
GENETICS HEREDITY
PUBLIC ENVIRONMENTAL OCCUPATIONAL HEALTH
OPERATIONS RESEARCH MANAGEMENT SCIENCE
ENERGY FUELS
PLANT SCIENCES
GEOLOGY
MARINE FRESHWATER BIOLOGY
EMERGENCY MEDICINE
BUSINESS ECONOMICS
WATER RESOURCES
COMPUTER SCIENCE
AGRICULTURE
ENGINEERING
ENVIRONMENTAL SCIENCES ECOLOGY

0 1000 2000 3000 4000 5000 6000 7000 8000

Fig. 3 Research subject areas under the topic “EMS”

FISHERIES
SCIENCE TECHNOLOGY OTHER TOPICS
MARINE FRESHWATER BIOLOGY
EDUCATION EDUCATIONAL RESEARCH
CHEMISTRY
GEOLOGY
URBAN STUDIES
CONSTRUCTION BUILDING TECHNOLOGY
PUBLIC ENVIRONMENTAL OCCUPATIONAL HEALTH
SOCIAL SCIENCES OTHER TOPICS
GEOGRAPHY
FORESTRY
COMPUTER SCIENCE
PUBLIC ADMINISTRATION
ENERGY FUELS
WATER RESOURCES
BUSINESS ECONOMICS
AGRICULTURE
ENGINEERING
ENVIRONMENTAL SCIENCES ECOLOGY

0 2000 4000 6000 8000 10000 12000

Fig. 4 Research subject areas under the topic “Sustainability”

This is to be interpreted as an indication of some possible contact points

between them.
From a chronological point of view, the earliest paper included in the dataset
regarding the EMS literature was published in 1970 and the most recent in 2011,
since the 2012 has been excluded (more than the 75 % of publications included in
the dataset have been published since January 2000), as showed in Fig. 5.
The same trend is evidenced when it comes to publications regarding
Sustainability, as shown in Fig. 6.
The authors with higher number of articles included in the EMS dataset are
Huang (152 articles), Chang (75), Li (52), Khan (35) (Fig. 7), while the most
productive authors in the area of Sustainability are Marchettini (40), Bastianoni
(39), Dincer (38), Folke (35) (Fig. 8).
Environmental Management Systems: Enabling Tools Towards Sustainability? 177

3000

2500

2000

1500

1000

500

0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Fig. 5 Number of published articles over the years (Keyword “EMS”)

5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1974
1977
1978
1979
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Fig. 6 Number of published articles over the years (Keyword “Sustainability”)

ZHANG Y
WEIGOLD E
WANG L
O'NEILL TW
LI J
HERLITZ J
FORTI G
DAVIS DP
CHRISTENSEN TH
STIELL IG
EISENBERG MS
ZHENG Y
VANDERSCHUEREN D
LI H
REA TD
LIU Y
KHAN S
LI YP
CHANG NB
HUANG GH
0 20 40 60 80 100 120 140 160

Fig. 7 The most productive authors in the dataset (Keyword “EMS”)

178 L. Cagnazzo et al.

BAKSHI BR
SUMAILA UR
HABERL H
CAIRNS J
SINGH A
PULSELLI FM
NIJKAMP P
NICCOLUCCI V
ZHANG Y
ULGIATI S
GIAMPIETRO M
CHEN B
COSTANZA R
SCHOLZ RW
LAL R
FOLKE C
DINCER I
BASTIANONI S
MARCHETTINI N
0 5 10 15 20 25 30 35 40 45

Fig. 8 The most productive authors in the dataset (Keyword “Sustainability”)

The countries most involved in the EMS researches are USA (8,945 papers),
England (1,997), China (1,901), Canada (1,761), Australia (1,679), Germany
(1,641) and Italy (1,107) (Fig. 9).
Very similar considerations can be done for the countries most involved in the
Sustainability researches, that are USA (10,106 papers), England (3,756), Australia
(2,877), Canada (2,476), Germany (1,850) and Netherlands (1,618) (Fig. 10).

2.3 A Qualitative Literature Analysis

The results listed in Sect. 2 allow authors to appreciate the link between EMS
and Sustainability. To reinforce or refuse the thesis that EMS contributes to
Sustainability, it is interesting to deepen what some of the main works in literature
say about this connection, if exists, in different applications, business aspects or
environmental and social subjects.
In particular, Lam et al. (2011) investigated how EMSs interact with green
specifications and whether or not they complement each other. In their findings
they gave the reasons for adopting green specification and highlight environmental
issues that may not be addressed by solely adopting EMS. The authors present the
results of a recent survey of practitioners concerning their opinions towards green
specifications and possible impacts arising from their adoption. From the result of
their survey, a framework for developing green specification is deemed valuable for
the cities that are striving for sustainability. Additionally the level of acceptable
changes brought about by green specifications as perceived by different industry
stakeholders is found to be unrelated to whether they were from organizations
implementing EMS or not.
Environmental Management Systems: Enabling Tools Towards Sustainability? 179

BELGIUM
SOUTH KOREA
GREECE
TAIWAN
SCOTLAND
SWITZERLAND
BRAZIL
SWEDEN
INDIA
JAPAN
FRANCE
SPAIN
NETHERLANDS
ITALY
GERMANY
AUSTRALIA
CANADA
PEOPLES R CHINA
ENGLAND
USA
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

Fig. 9 Countries with the largest number of published documents in the dataset (Keyword
“EMS”)

TURKEY
AUSTRIA
NEW ZEALAND
SOUTH AFRICA
SCOTLAND
SWITZERLAND
JAPAN
SWEDEN
BRAZIL
INDIA
FRANCE
SPAIN
ITALY
PEOPLES R CHINA
NETHERLANDS
GERMANY
CANADA
AUSTRALIA
ENGLAND
USA
0 2000 4000 6000 8000 10000 12000

Fig. 10 Countries with the largest number of published documents in the dataset (Keyword
“Sustainability”)

Curkovic and Sroufe (2010) conducted a case based research to demonstrate that
ISO 14001 registration can be leveraged across the supply chain into a competitive
advantage. By looking at ISO 14001 registered firms, they compared different
amounts of integration and sustainability in the supply chain. The general objective
in their study was to explore the strategic supply chain implications of ISO 14001
adoption with the aim of building theory, and to identify possible relationships or
effects that may occur during the process, and not to describe average effects of the
industries. The process was structured as follows: sample selection, interview
180 L. Cagnazzo et al.

protocol, data collection and data analysis. Respondents were asked to provide
perceptual information at the plant level regarding ISO 14001. Results showed that
reasons for not embracing the new standard are now more generally categorized as
risks. These risks are financial, exposure, change management and lagging the
competition. These risks are typically more scrutinized by resource constrained
plants or by those plants that may choose only to obtain registration after others in
the industry have successfully obtained registration. The data reduction and cate-
gorization process created the following six main concepts for pursuing ISO
registration listed in order of most prevalent to least prevalent: (1) competition;
(2) customers; (3) image/reputation; (4) risk mitigation; (5) resource conservation;
(6) cost reduction. Paradoxically, cost reduction and competition are also listed as a
reason for registration, but in the reverse order of the risk attributed to not register-
ing. Lambert and Cooper (2000) stated that supply chain management represents a
significant paradigm shift of modern business management by recognizing that
individual businesses compete with each other no longer as solely autonomous
entities but rather as supply chains. Supply chain design is integral in order for an
organization to accomplish its EMS and sustainability goals. Choosing to partner
with suppliers that have policies supporting an organization’s EMS is at the heart of
the effectively implementing a sustainability strategy. Supply network structure can
help support such a strategy and be characterized as emphasizing non-power based
relationships and inter-firm coordination as well as the informal social system that
are linked through a network of relations (Chen and Paulraj 2004).
Gonzalez et al. (2008) analyzed the existence in the implementation of environ-
mental practices between companies that possess any certifiable environmental
management system (ISO 14001 or EMS) and those that do not have any such
system. Their study also investigates whether companies with a certified EMS are
also making additional environmental demands on their suppliers. They found a
positive relation between the possession of certified EMS, specifically ISO14001
and eco-management and audit scheme, and the environmental demands that these
organizations impose on their suppliers. The environmental demands on suppliers
increase with customer organization size but the degree of internationalization,
measured by the rates of imports and exports, does not show a significant relation-
ship to these pressures. The automotive sector underwent an important expansion
process in the 1990s motivated by trend towards globalization and decentralization
of activities, all of which led to the outsourcing of a large part of the manufacturing
of automotive components. They proved that three types of practices (e.g. environ-
mental product design, reduction of material usage, and managerial aspects) are
found to be more developed in those companies that have implemented some form
of certified EMS. Additionally the proved that there was no difference between
those companies that have implemented only ISO 14001 and those that have also
decided to jointly implement ISO 14001 and EMAS. Their study carried out a
positive relation between the possession of certified EMS and demands that the
company imposes on its suppliers to adopt environmental practices. These demands
mean that environmental concerns diffuse upstream in the supply chain. A number
of studies show that the adoption of environmental management practices provides
Environmental Management Systems: Enabling Tools Towards Sustainability? 181

benefits or advantages to organizations (Gonzalez-Benito and Gonzalez-Benito

2005). These benefits include possible improvements in productivity, competitive-
ness, business profitability, or a green image. These advantages may be achieved by
establishing two basic objectives (Johnson and Wang 1998): (a) reducing the waste
generated, (b) maximizing the efficiency of the resources employed (by means of
recycling, reuse or any other type of reclamation activities).
Handfield et al. (2002) propose that ISO 14001 certification may be a motivating
factor for the implementation of beneficial corporate environmental practices, a
critical issue, which is open to debate and thus research in the field.
Wagner (2008) analyzed the hypothesis that environmental management
systems (EMS) and managerial activities to reduce negative environmental impacts
which are not part of EMS have a positive influence on the probability of firms to
carry out environmental innovations. Based on binary and multinomial discrete
choice models, the relationship of a number of determinants on the occurrence of
environmental innovations is studied using data collected during the “European
Business Environmental Barometer 2001–2002” survey in nine European states.
This study finds that environmental management systems are associated with
process innovations. Unfortunately his study does not find that environmental
management systems are associated with product innovations. For product
innovations, mainly information of consumers and eco-labelling activities show a
positive association. Market research on the potential of environmental innovations
positively relates to both process and product innovations. Importantly, firm size is
not found to have any effect on the probability of a firm carrying out environmental
product or process innovations. Market research on green products likely leads to a
better understanding of profitable demand for product innovations with environ-
mental benefits, for example in cooperation with lead users. As well, it enables
firms to identify environmentally oriented customer segments. Therefore its strong
positive effect on environmental product innovations can be explained well. The
additional effect on process innovations is more surprising, it may however be
explained by the fact that an environmental product innovation can also imply
changes in the production process and in the strategy behind the EMS.
Rubik and Teichert (1997) suggest that for reasons of reputation and credibility,
firms forcing environmental product innovation also need to show above-average
environmental performance in production, which may imply simultaneous promo-
tion of environmental process innovation and improvements of the EMS. Environ-
mental innovations can be defined as “. . .measures of relevant actors (firms, . . .,
private households), which: (i) develop new ideas, behavior, products and pro-
cesses, apply or introduce them, and (ii) contribute to a reduction of environmental
burdens or to ecologically specified sustainability targets” (Rennings 2000).
Rehfeld et al. (2007) state that the specification of the direction of technological
change defined by (ii) is an essential definition criterion for environmental
innovations. Rennings (2000) furthermore shows that from (ii) the double external-
ity characteristic of environmental innovations can be derived, which can also be
used to delineate them from other innovations.
182 L. Cagnazzo et al.

Eltayeb et al. (2010) tried to assess the actual environmental, economic and
intangible outcomes resulting from the adoption of green supply chain initiatives.
Their study used a structured questionnaire derived from the literature and
employing a mail survey to collect responses from a group of 569 ISO 14001
certified firms in Malaysia. The results of testing the hypotheses that predicted that
green supply chain initiatives have positive effect on the outcomes showed that
eco-design have significant positive effect on the four types of outcomes (environ-
mental outcomes, economic outcomes, cost reductions and intangible outcomes).
Reverse logistic was found to have significant positive effect on cost reductions
only. However, green purchasing was not found to have significant effect on any of
the four types of outcome. Through designing environmentally friendly products
and taking back products and packaging, business organizations can generate
benefits to the environment, in the form of reduced waste and better resource
utilization, in addition to economic benefits and cost reductions to the
organizations. The traditional green initiatives are associated with many
weaknesses and problems. The end-of-the-pipe approach does not eliminate
pollutants, but merely transforms them from one medium to another (Sarkis
2001). Moreover, focusing green practices inside organizations may expose the
organization and the relative EMS structure to negative environmental performance
of other organizations in its supply chain. For instance, the poor environmental
performance of small suppliers can affect badly the performance and image of
buying companies (Christmann and Taylor 2011). Green supply chain is defined as
“the extension of the traditional supply chains to include activities that aims at
minimizing environmental impacts of a product throughout its entire life cycle,
such as green design, resource saving, harmful material reduction and product
recycle or reuse” (Beamon and University of Washington 1999). While environ-
mental management principles and standards provide powerful tools that have a
potential to generate significant improvements to environmental performance of
organizations, their focus is restricted only on creating and documenting environ-
mental policies and procedures (Curkovic et al. 2005). Such policies and
procedures may represent efforts to improve environmental performance only
within the organization’s operational boundaries rather than being extended
throughout the supply chain (Bansal and Celland 2004).
Massoud et al. (2010) examined the variations in perceptions of a number of
environmental and human resource constructs that are operationalized and
measured in the field at Mexican maquiladoras. Differences between organizations
with a certified EMS, informal EMS and no EMS are examined. The authors found
that significant facility differences existed for all environmental management
practices and perceived environmental performance across all levels of EMS,
with certified EMS facilities being the highest, informal EMS facilities being
second and facilities with no EMS being lowest. An EMS has the primary purpose
of preventing negative effects on the environment and improving a firm’s environ-
mental practices. This is achieved by developing environmental programs and
practices. The adoption of cleaner production processes, greener products, and
measures of environmental performance also contribute to the successful
Environmental Management Systems: Enabling Tools Towards Sustainability? 183

implementation of an EMS (Gupta 1994). An EMS is a voluntary approach, which

can lead to the reduction of environmental impacts such as pollutant emissions
(Szymanski and Tiwari, 2004). Previous research also suggests that a strong link
exists between human resource (HR) factors and the implementation of an EMS
(Daily et al. 2007). The environmental programs and practices associated with an
EMS are considered important factors in reducing the impact of business on the
natural environment. For example, green technologies and products as well as
metrics to evaluate and monitor environmental performance can lead to improved
environmental performance (Gupta 1994). An EMS can play an important role in a
firm’s environmental performance. Environmental management standards, such as
ISO 14001, have been shown to be positively related to both environmental
performance and operational performance (Sroufe 2003a; Epstein and Roy 1997)
also point out that ISO 14001 can contribute to organizational learning by develop-
ing core capabilities, skills, and knowledge. Sroufe (2003b) found that firms with
existing informal EMSs saw little benefit in expending additional time and
resources to attain ISO 14001 certification. Other studies support these findings,
but also show further benefits. Certification has added benefits such as greater
visibility, procedural legitimacy, and external recognition. It also assists in
maintaining and improving an existing EMS (Jiang and Bansal 2003).
Holton et al. (2009) present key findings from four case studies undertaken to
investigate how the leaders in corporate sustainability in the UK precast concrete
industry were managing for sustainability. It was found that by adopting a compli-
ance approach, characterized by the development of management systems and
continuous performance improvement cultures, the four companies were engaged
in the activities and developing the capabilities necessary to manage for
sustainability, and had progressed naturally to the efficiency phase of corporate
sustainability. The most important aspects to be pointed out are the following:
(a) Managing for sustainability in each company began with a compliance approach
based primarily on the development of ISO 14001 certified environmental manage-
ment systems, (b) the principal benefit of developing certified management systems
was the development in each company of a continuous performance improvement
culture, (c) by adopting a compliance approach there was evidence that the four
companies studied had progressed naturally to the efficiency phase of corporate
sustainability, (d) the is a tendency for organizations to focus on improving only
their environmental performance and therefore only achieve progress towards
eco-efficiency. In order to develop a comprehensive efficiency approach to
sustainability, there is also a need to achieve complementary progress towards
socio-efficiency, the four companies were achieving this by broadening their
sustainability focus and making better use of their human capabilities, (e) the
commitment of senior management in each company was essential for the success
of the change process, but it was also important for that commitment to be
transferred down through the company and for change agents to be established at
different operational levels, (f) the development process is characterized by grad-
ual, planned, continuous and ongoing incremental change, but to progress beyond
this may require more transformational change and strategic repositioning and
184 L. Cagnazzo et al.

(g) developing management systems and continuous performance improvement

cultures has led to each company engaging in the activities and developing the
capabilities necessary to manage for sustainability. Dunphy et al. (2003) suggest
that managing for sustainability is critical to the development of corporate
sustainability. Roome (1998) states that managing for sustainability is fundamen-
tally about strategic organizational development and change, change in manage-
ment structure, systems and competencies.
Boiral and Gendron (2010) investigates the extent to which certification auditing
can contribute to the realization of organizational accountability for sustainable
development. The work illustrates the pertinence of studying the auditing function
from a cross-disciplinary view point, and of paying attention to the process by
which auditing travels from one discipline to another. They are proposing an
integrative and dynamic model of the institutionalization process and myth forma-
tion surrounding sustainability auditing. Their model indicates that the legitimacy
of certification auditing is anchored in rational myths that reveal significant
discrepancies and decoupling between, on the one hand, the imagery of rationality
and rigor surrounding auditing and, on the other hand, the actual audit processes as
taking in the field. In recent years, certifiable standards on reporting and manage-
ment practices for sustainability have been increasingly adopted by organizations
across the world. Standards on sustainability reporting, such as the Global
Reporting Initiative (GRI) framework, mainly aim to improve the reliability and
transparency of environmental, social and economic disclosures (Unerman et al.
2007). Standards on management practices, such as ISO 14001, are focused on the
implementation of control systems, the central purpose of which is to manage an
organization’s environmental and social responsibility (ISO (International Organi-
zation for Standardization) 2008).
Firms choose to seek environmental management systems (EMS) certifications
such as ISO 14001 for a variety of reasons. Takuya Takahashi and Masao
Nakamura (2010) put forward a hypothesis that firms seek ISO 14001 certifications
for their establishments when their operations involve low degrees of complexity.
Another hypothesis they consider, is that firms facing more uncertainty in their
operations (and hence more risk) seek ISO 14001 certification. These hypotheses
have not been addressed in the literature and are of particular interest to business
managers and policymakers. They empirically test these hypotheses using mathe-
matical models. Their findings support the first as well as the second hypotheses.
This suggests that firms tend to certify more routine and less complex operations
first, and that firms use ISO 14001 certifications as an insurance scheme. Environ-
mental concerns continue to play an important role in firms’ management decisions.
Many firms decide to adopt some form of environmental management system
(EMS) to address such concerns. Furthermore, some firms choose to be certified
under recognized international standards. For example ISO 14001 is an interna-
tional, voluntary standard certification scheme for an EMS managed by the Inter-
national Organization for Standardization (ISO). Broadly speaking, there are at
least two types of circumstance, one external and the other internal, in which firms
are likely motivated to seek EMS certifications (Rivera-Camino 2001). These types
Environmental Management Systems: Enabling Tools Towards Sustainability? 185

of circumstance are explained as follows. The first type of circumstance is

characterized by the presence of external pressures being placed on firms, where
such pressures come from bodies that are external to the firms such as governmental
agencies and markets in which the firms operate (Khanna and Anton 2002)
(e.g. strict government regulations, market considerations, green consumers and
environmental friendliness). The second type of circumstance in which firms are
motivated to certify, arises when the firms face significant internal pressures. Many
factors that might cause these two types of circumstance may interact with each
other and promote firms for firms to adopt EMS certifications unless the firms have
environmentally conscious managers and human resources. Takuya Takahashi et al.
(2009) therefore argued that cost-minimizing and risk-averse firms decide to seek
ISO 14001 environmental management certifications based on two considerations:
(i) the cost of certification based on the degree of complexity of their operations
(i.e. routine operations are certified first) and (ii) the benefit of using ISO 14001 as
an insurance scheme against the uncertain, but major, environmental risks that
might be inherent in their operations. Such economic decisions by firms seems
plausible because of the known high costs associated with applications for and
maintenance of such certifications over time on one hand, and the potentially high
costs of uncertain environmental disasters that might occur on the other.
In general, companies make choices based on the opportunities and advantages
they can obtain as an outcome of their behaviors, as any other societal organism.
According to Morrow and Rondinelli (2002) the choice of installing and managing
an EMS is motivated by drivers such as stakeholder pressures, regulatory pressures,
ability, parent company’s influence, and market conditions. While many such
reasons apply to large companies, the behavior of small and medium enterprises
(SMEs) is different. SMEs may see EMSs almost as a mandatory issue, especially if
they operate in certain markets (e.g. energy). Their rationale for the implementation
of EMSs is often based on a large number of heterogeneous factors (Uchida and
Ferraro 2007). While implementation related aspects such as improved risk man-
agement capabilities and reduction of environmental impacts are of interest in these
cases, reputational implications are often prevalent in determining willingness to
realize an EMS. Especially in SMEs, the possibility to enter the club of members
managing a certified EMS represents a goal that is seen as having market potential
in accordance to the club theory (Kollman and Prakash 2002). In some cases the
path is eased by public funding, in accordance to public policies aimed at increasing
the competitiveness of SMEs. While ‘external’ factors seem to be prevalent as
motivation drivers (Uchida and Ferraro 2007), the outcomes are nevertheless of
positive impact: managers learn how to cope with new management systems
resulting in an overall environmental benefit. It is practical experience of the
authors of this work that – as reported in the literature (Uchida and Ferraro 2007;
Kollman and Prakash 2002; Iraldo et al. 2010) – one of the main positive outcomes
in SMEs, is the awareness in the legal implications and actual weaknesses of the
current organization, that lie major benefits when seeking registration of EMSs. An
SME suddenly realizes the amount of national and regional laws and regulations
that must be obeyed to fulfill legal obligations, that simply was not aware of.
186 L. Cagnazzo et al.

It has to be observed that SMEs approach EMS certification and verification

starting from ISO rather applying directly the EMAS scheme. This is both because
of different complexity in EMSs and because of marginal gain in reputation
resulting by the application of EMAS, as opposed to the ISO scheme as perceived
from the viewpoint of a SME.
Moreover, consider that co-financing by public funding may induce unwanted
needs in companies, such as the attitude of collecting management systems (quality,
environmental, health and safety, . . .), for the only reason that public funds can be
exploited to increase visibility of the company. Also, it is already recognized that
dealing with such systems may divert attention of companies away from other more
mission-related tasks.

3 Discussion

The quantitative and qualitative analyses highlight an increasing interest in both

research topics related to EMSs and sustainability. Both scientific and empirical
evidences support the consideration that the benefits in adopting EMSs in
organizations overcome the associated drawbacks and limits. Through the imple-
mentation of an EMS, companies, as well as other stakeholders, increase their
sensitivity and awareness with respect to the enlarged view offered by sustainable
principles and strategies. This aspect is in fact implied by the contents of the
qualitative analysis and of the case study described in Sect. 4. Although there are
no clear evidences both in literature both in real industrial cases about the fact that
EMSs direct support the economical and social perspectives, companies experience
a positive influence in adopting EMSs on the environmental aspects, making them
valuable tools towards sustainability. Higher discipline devoted to the environment
and the related regulations and a more proactive attitude are both positive outcomes
resulting in practical EMSs implementations. Apart from specific industrial sectors
such as the chemical one or the forestry, where social effects of EMSs
implementations can also be of great impact, marginal social outcomes result
from their application in many service and in other manufacture oriented
businesses. Regarding the economical implications, evidences seem not to be
found in the analyzed literature. While it is true that wastes can be reduced as a
consequence of an increased attention by management, it is also to be considered
that implementation of an EMS is a complex and complete industrial project.
Consequently, initial investments can be considerable and may have a medium
time payback period. If policies and objectives are not strongly enforced, this could
be a reason for the company to early drop the EMS realization and fail to benefit
from additional implications in the sustainability area.
As additional evidence, consider that several of the companies listed in the Dow
Jones Sustainability Index manage a certified ISO 14001 EMS, thus supporting the
correlation between sustainability and EMSs. While the existence of this relation-
ship can be stated as evidenced by the considerations in this chapter, EMSs must be
Environmental Management Systems: Enabling Tools Towards Sustainability? 187

accompanied by other strategic actions if the risk of drinking old wine in a new
bottle is to be avoided.

4 Case Study

In order to remark the statements in Sect. 3, it is valuable to consider, as an

example, the case of a small company offering cleaning services, whose path
toward the realization of an EMS, has recently been analyzed by the authors. The
adopted EMS has clarified which laws were applicable and to which extent. Major
behavioral differences before and after application regarded the disposal of waste
belonging to the European List of Waste (The European Waste Catalogue) and the
correct application of the upcoming Italian waste traceability system, that is about
to become mandatory for all companies producing wastes. In both cases the
company realized that previous behaviors were not complying. In the case of
cleaning services the environmental impacts are clearly marginal and cannot be
reduced below a certain level, given that cleaning products must be used. Conse-
quently the initial environmental review that is listed in ISO 14001 and ISO 14004
and easily becomes the basis for the environmental statement under EMAS, did not
highlight major opportunities for improvements with respect to the environment:
low-pollution cars were already in use for allowing operators to reach cleaning sites
and eco-products were already used – when possible – for the operations. Never-
theless the company went through a process that produced knowledge for all
involved actors. This a benefit resulting every time certification is sought: managers
and representatives within the company make a large step forward in their appreci-
ation of the details in an EMS, consultants helping the company reach certification,
enlarge their view on this subject by solving new application specific issues, the
certification body increases knowledge by allowing its auditors to be exposed to
new challenges in interpreting and applying normative requirements. Comprehen-
sively, all stakeholders have a competitive advantage that has its peaks during the
pre- and certification-audits. In the mentioned case about the cleaning services, the
company had an additional benefit in the development and strengthen of an own
network of relationships: with partner organizations (suppliers and customers) and
with the local chamber of commerce. Suppliers were involved to specify properties
of cleaning products and to update accompanying documents, customers were
involved because of the adoption of new procedures requiring accident prevention
and thus a certain level of collaboration by the site owners. The chamber of
commerce was involved to help interpret national regulations regarding waste
disposal. None of the topics discussed with these partners was given for granted:
each subject posed new challenges and thus true increase in knowledge was gained
at least in this local circle of actors.
We can then say that besides the evident environmental benefit a knowledge
increase benefit results for the society as a whole. In this specific case, other side
effects were the increased sensitivity of the company with regards to obeying all
188 L. Cagnazzo et al.

applicable rules. The fact that not all environmental laws were followed, raised
concerns towards health and safety and social accountability issues, that are only
marginally implied by the EMS requirements. Thus, a thorough analysis was
performed in the ample set of related norms. Two outcomes resulted: the correct
application of all rules, comprising new procedures to care for collaborators health
issues and improved quality of labor contracts that modified constraints of both
parties to comply with national labor contracts and a mechanism to keep all this
information updated. Obviously a much more robust organization resulted from all
these operations. The role of certifiers and auditors was also important: they
brought their expertise in the process and provided both technical and managerial
insights, highlighting the company strengths and help improving its weaknesses. As
an example, the certification organization provided the company with a 30-page
length check-list to verify legal compliance against the provided set of
updated laws.

5 Conclusion

Sustainability is a key issue of today society. Within this context, business

sustainability is part of the problem, and can be part of the solutions. Recent
researches have demonstrated that companies affect and are affected by
sustainability, and that sustainability opens both opportunities and threats.
However, how to stimulate Sustainability in the companies? Are there enabling
tools (such as EMSs) that could directly increase the company Sustainability?
In answering these research questions, it’s important to investigate if there is a
direct correlation between EMSs and an increasing level of company sustainability.
This has been investigated in this work.
Through a triple approach (quantitative and qualitative research plus a case
study analysis), the authors could conclude that an EMS can be thought of as a
tool enabling the company’s path towards sustainable strategies and operations.
This is especially evident for the environmental and, less, for the social pillars;
nothing can be demonstrated for the economical impact, since there are no clear
evidences about the EMSs influence on that.

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The Green Option Matrix to Characterize
Green Products and Practices
Applications to the Upholstered Furniture
and the Footwear Industries

Rosa Maria Dangelico and Pierpaolo Pontrandolfo

1 Introduction

Nowadays, to become ‘green’ is both a need and an opportunity for companies. The
reasons that push firms to go ‘green’ can be very different, such as legitimacy,
competitiveness, and ecological responsibility (e.g. Shrivastava and Hart 1995;
Bansal and Roth 2000; González-Benito and González-Benito 2006; Murillo-
Luna et al. 2008). As a result, a growing number of companies are embracing
environmental sustainability into their strategies (Dyllick and Hockerts 2002). In
this context, the development of green products is becoming more and more
relevant. In fact, the Green Paper on Integrated Product Policy (Commission of
the European Communities 2001) states that one way to achieve the target of
sustainable development is “a new growth paradigm and a higher quality of life
through wealth creation and competitiveness on the basis of greener products”. The
development of green products can also be a means for companies to achieve
competitive advantage. For example, Porter and Reinhardt (2007) highlight the
need for companies to adopt a strategic approach to climate and to take action now,
underlining the opportunity to gain competitive advantage by creating green

This paper is based on Dangelico, R.M., Pontrandolfo, P. (2010) From Green Product
Definitions and Classifications to the Green Option Matrix, Journal of Cleaner Production,
Vol. 18, No. 16–17: 1608–1628.
R.M. Dangelico (*)
Department of Computer, Control and Management Engineering, Sapienza – University of
Rome, Via Ariosto, 25, 00185 Rome, Italy
e-mail: [email protected]
P. Pontrandolfo
Department of Mechanics, Mathematics and Management, Politecnico di Bari, Viale Japigia,
182, 70126 Bari, Italy
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 191
DOI 10.1007/978-3-642-37018-2_9, © Springer-Verlag Berlin Heidelberg 2013
192 R.M. Dangelico and P. Pontrandolfo

products, able to exploit climate-induced demand (such as hybrid cars). Therefore,

the number of companies facing the green product challenge is supposed to rapidly
grow in the next years. This is coherent with the growing trend of companies that
obtain yearly the European Eco-label for their products. In fact, while at the end of
2000 about 50 companies obtained European Eco-label for their products, at the
beginning of 2010, this number has grown to more than 1,000.
In the literature, research on green product innovation is growing in interest
(e.g. Baumann et al. 2002; Pujari et al. 2003; Rehfeld et al. 2007). In particular, green
products are receiving increasing attention as means to improve companies’ perfor-
mance (Pujari 2006; Chen et al. 2006; Chung and Tsai 2007). However, the debate
regarding what constitutes a green product (e.g. Chen 2001; Baumann et al. 2002;
Berchicci and Bodewes 2005) is still ongoing. Similarly, there is much uncertainty
among firms on the product dimensions to be considered to develop green products.
This paper aims at providing a description and a characterization scheme of the
main different options to develop green products. The goal is then providing a
matrix useful for companies to compare industrial sectors’ green products and
practices and to communicate to stakeholders the environmental features of their
green products and practices.
The paper is structured as follows: Sect. 2 reports a literature review of the main
definitions and classifications of green products, whereas Sect. 3 proposes a new
dimension of characterization, so developing the Green Option Matrix (GOM),
which represents a guide for companies to position their own green products and
communicate them to stakeholders, analyze competitors’ green products, so
highlighting new spaces to be explored for green product design. In Sect. 4, the
proposed matrix is used to analyze green products and practices developed by a
sample of companies belonging to the upholstered furniture and footwear
industries, while in Sect. 5 directions for companies on how to use the GOM are
provided. Finally, in Sect. 6 discussion and conclusion are reported.

2 Definitions and Classifications of Green Products

The many meanings of the word ‘green’ have been discussed in the literature
(e.g. Kleiner 1991; McDonagh and Prothero 1996; Miller and Szekely 1995;
Silverstein 1993). In particular, McDonagh and Prothero identify several
dimensions of green, such as ecological, political, corporate social responsiveness,
fair trade, conservation, non-profit, new-consumerism, sustainability, and equality.
These concepts are very broad and embrace very different aspects, so generating
confusion on the meaning of ‘green’ and not giving clear directions to companies
willing to become green. Similarly, at the product level, several attempts have been
made to define what a green product is (e.g. Peattie 1995; Roy et al. 1996; Ottman
1997). Nevertheless, there is still confusion on what constitutes an environmentally
friendly product (Baumann et al. 2002; Berchicci and Bodewes 2005).
Some authors have tried to define ‘green products’. Peattie (1995, p. 181) defines
a product as ‘green’ when its environmental and societal performance, in
The Green Option Matrix to Characterize Green Products and Practices 193

production, use and disposal, is significantly improved and improving in compari-

son to conventional or competitive products offerings. This definition highlights the
different life cycle phases during which a product can show its environmentally
friendly features.
Reinhardt (1998, p. 46), focusing on green business, state that: a business creates
products that provide greater environmental benefits, or that impose smaller
environmental costs, than similar products. This definition points out that green
products are not only those products with a lower environmental impact, but also
those providing higher environmental benefits compared to conventional products.
Ottman et al. (2006, p. 24) state that although no consumer product has a zero
impact on the environment, in business, the terms ‘green products’ or ‘environmen-
tal product’ are used commonly to describe those that strive to protect or enhance
the natural environment by conserving energy and/or resources and reducing or
eliminating use of toxic agents, pollution, and waste. This definition stresses the
main types of environmental focus of green product development, namely energy,
resources, pollution and waste.
The Commission of the European Communities (2001) defines green products as
products that use less resources, have lower impacts and risks to the environment
and prevent waste generation already at the conception stage. This definition
emphasizes the importance of designing products as ‘green’ since the conceptuali-
zation phase.
Several other authors have highlighted the distinctive features of green products
(Table 1).
The many definitions and characteristics of green products prompt the need to
develop a coherent framework in which integrating them. Although in some
definitions and characteristics of green products the social performance is men-
tioned, in this paper, we chose to refer to a product as ‘green’ only on the basis of its
environmental performance.
In the literature, different perspectives to classify products have been identified,
namely marketing, organization, engineering design, and operations management
(Krishnan and Ulrich 2001). Green product design can be thought of as a fifth
perspective (Sousa and Wallace 2006). In fact, the natural environment represents a
driver to redesign existing products or to create new ones, making them more
energy efficient or less material intensive (Shrivastava 1995).
Several green product classifications have been developed driven by distinct
classification purposes. Taxonomy dimensions can be product characteristics
(e.g. Rombouts 1998), level of environmental impacts (e.g. Hanssen 1999), or
types of environmental improvement strategies (e.g. Park et al. 1999; Rose et al.
1999). Kaebernick and Soriano (2000) use a simplified approach to assess the
conceptual design phase, by classifying products into groups according to their
environmental features. They consider four product life cycle phases (materials,
process, usage, and disposal) and divide products into two groups, distinguishing
two kinds of impact drivers, namely energy based and material based. Sousa and
Wallace (2006) develop an automated classification system guiding the identifica-
tion of product groups based upon environmental categories. Dewberry and Goggin
194 R.M. Dangelico and P. Pontrandolfo

Table 1 Review of the characteristics of green products

Authors Characteristics associated with the ‘green’ nature of a product
Elkington and Hailes Not endangering the health of the consumer or of others
(1988) Causing no significant damage to the environment during manufacture
use or disposal
Not consuming a disproportionate amount of energy during
manufacture, use and disposal
Not causing unnecessary waste, either because of overpackaging or
because of an unduly short useful life
No use of materials derived from threatened species or from threatened
environments
Not involving unnecessary use or cruelty to animals
Not adversely affecting other countries, particularly the third world
Simon (1992) Reduced raw material, high recycled content
Non-polluting manufacture/non-toxic materials
No unnecessary animal testing
No impact on protected species
Low energy consumption during production/use/disposal
Minimal or no packaging
Reuse/refillability where possible
Long useful life, updating capacity
Post-consumer collection/disassembly system
Remanufacturing capability
Schmidheiny (1992) Eliminate or replace product
Eliminate or reduce harmful ingredients
Substitute environmentally preferred materials or processes
Decrease weight or reduce volume
Produce concentrated product
Produce in bulk
Combine the functions of more than one product
Produce fewer models or styles
Redesign for more efficient use
Increase product life span
Reduce wasteful packaging
Improve reparability
Redesign for consumer reuse
Remanufacture the product
Peattie (1995) Recyclability
Resource efficiency
Emissions
Impact on ecosystems
Social impact
Sustainability of resource use
Waste and disposal
Eco-efficiency of production and organization
Robert (1995) Minimize the use of nonrenewable materials
Avoid the use of toxic materials
Use renewable resources in accordance with their rate of replenishment
(continued)
The Green Option Matrix to Characterize Green Products and Practices 195

Table 1 (continued)
Authors Characteristics associated with the ‘green’ nature of a product
Shrivastava and Hart Low environmental impact during usage
(1995) Easily composted, reused, or recycled at the end of their useful life
Roy et al. (1996) Capable of lessening global environmental problems
Energy efficient
Easily repairable
Designed to last, or to be reused, reconditioned or recycled
Generates minimum pollution and waste
Can be disposed of safely
Minimal use of materials, including packaging
Manufactured from renewable or abundant resources, or recycled
materials
Manufactured, if possible, locally and from locally obtainable materials
to reduce transport requirements
Environmental information on product available to purchaser
Not harmful to human health
Satisfies a genuine human need
Luttropp and Do not use toxic substances and utilize closed loops for necessary but
Lagerstedt (2006) toxic ones
Minimize energy and resource consumption in the production phase and
transport
Use structural features and high quality materials to minimize weight
Minimize energy and resource consumption in the usage phase
Promote repair and upgrading
Promote long life
Invest in better materials, surface treatments or structural arrangements
Prearrange upgrading, repair and recycling
Promote upgrading, repair and recycling
Use as few joining elements as possible
Ljungberg (2007) Reduce the materials and the use of energy for a product
Reduce emissions, dispersion and creation of toxics
Increase the amount of recyclable materials
Maximize the sustainable use of renewable resources
Minimize the service intensity for products and services
Extend the useful life for a product
Assess and minimize the environmental impact
Having a “functional economy”
Use “reverse logistics”
Increase the efficiency in the usage phase

(1996) develop an Ecodesign Matrix, subsequently used by Roy et al. (1996), to

classify the environmental impact of products on the basis of two dimensions: main
life cycle stage (production, use, and disposal) and environmental focus (energy,
materials/resources, pollution/toxic waste). Peattie (1995) classifies products on the
basis of their eco-performance, distinguishing different shades of ‘green’ (from
deep green to black) and types of products (absolute green or relative green). In
196 R.M. Dangelico and P. Pontrandolfo

particular, absolute green products contribute to the improvement of society or the

environment, whereas relative green products reduce the harm they cause to
society or environment. This distinction recalls the one made in Reinhardt’s
(1998) definition. The concept of absolute green product is quite close to those of
‘ameliorative product’, defined as a product necessary to survive environmental
deterioration (Ryan et al. 1992; p. 13), and of ‘sustainable-function product’,
defined as “a product (or service) that reduces a negative impact in its surroundings
to such an extent that the reduction exceeds the impact caused by the product’s
lifecycle itself” (Wever et al. 2008; p. 201). As highlighted by Wever and Boks
(2007), despite its high potential, this type of innovation lacks of academic
attention.
Based on these considerations, this paper expands the Ecodesign Matrix pro-
posed by Dewberry and Goggin (1996), adding a third dimension for green
products’ characterization, i.e. the type of environmental impact. In the next
Section, the three dimensions will be explained and integrated in a tridimensional
matrix.

3 The Green Option Matrix (GOM)

In order to synthesize and integrate in a coherent framework the different

dimensions of green products and to give relevance to the different types of
contributions of green products towards the environment, a tridimensional matrix
is developed.
Starting from the consideration that every product (even green ones) impacts on
the environment (Peattie 1995), it is important to clarify when, why, and how much
a product is green. It is then necessary to point out:
1. When, i.e. the phase of the product life cycle during which the green features
are expressed;
2. Why, namely the reason why the product can be considered green, which
involves recognizing the main environmental focus of the product;
3. How much, that is the type of impact on the natural environment.
With regard to the phase of the product life cycle, we will consider three main
phases: (i) before usage (including materials’ extraction, production processes,
transportation processes), (ii) usage, and (iii) after usage (end-of-life).
By environmental focus we refer to the main category of environmental impact
of a green product, as the latter can improve its impact on the environment with
emphasis on materials (including water), energy, or pollution (emissions and toxic
waste). We can then distinguish green products, on the basis of their main environ-
mental focus, respectively as green products focused on materials, energy, and
pollution.
Once recognized the three main types of environmental focus of green products,
it is possible to specify the type of impact, which we name as less negative, null, or
positive. A product can be considered green, in terms of one of the three
The Green Option Matrix to Characterize Green Products and Practices 197

FOCUS: MATERIALS

Less negative Null Positive

Material Consumption Material Supply

Wooden pallets
Conventional Wooden pallets made of certified Wooden pallets
wooden pallets designed to have designed to be
wood coming from
the minimum disassembled and
sustainably
weight and managed forests

Fig. 1 Green products with a focus on materials and levels of environmental impact (Evaluation
referred to a specific focus and life cycle phase)

environmental focus, if it has an environmental impact lower than conventional

products, or if it has a null impact, or if it positively contributes to environment,
reducing environmental impact of other products. Below we detail the definition
with respect to every environmental focus.
A green product with a focus on materials is, for example, a product that:
• Is produced using less amount of materials than conventional products (less
negative environmental impact);
• Uses only recycled materials or natural/biodegradable materials at a sustainable
rate (null environmental impact);
• Is designed to be reused, disassembled and remanufactured, or it is made of
materials that can be recycled, reducing then the environmental impact of other
products that will not require the consumption of virgin materials (positive
environmental impact).1
In Fig. 1 some examples of green products with a focus on materials and the
respective levels of environmental impact during a specific phase are shown.
Similarly, a green product with a focus on energy is, for example, a product that:
• Is more energy efficient than conventional products, or if part of the energy used
comes from renewable energy sources (less negative environmental impact);
• Uses only energy from renewable sources (null environmental impact);
• Produces energy from renewable sources, and in so doing reduces the environ-
mental impact that will be caused by other products (positive environmental
impact).
In Fig. 2 some examples of green products focused on energy and the respective
levels of environmental impact during a specific phase are shown.
A green product with a focus on pollution is, for example, a product that:

1
Products with a positive impact with regard to the focus ‘materials’ recall the concept of “cradle
to cradle”, since they allow a new life for materials.
198 R.M. Dangelico and P. Pontrandolfo

FOCUS: ENERGY

Less negative Null Positive

Energy Consumption Energy Production

Conventional Energy Lightings with Photovoltaic

lightings efficient integrated panels/Wind
lightings photovoltaic cells turbines

Fig. 2 Green products with a focus on energy and levels of environmental impact (Evaluation
referred to a specific focus and life cycle phase)

FOCUS: POLLUTION

Less negative Null Positive

Pollution Production Pollution Reduction

Conventional Hybrid Electric/ Photocatalytic

vehicles vehicles Hydrogen cements
vehicles

Fig. 3 Green products with a focus on pollution and levels of environmental impact (Evaluation
referred to a specific focus and life cycle phase)

• Is less pollutant than conventional products (less negative environmental

impact);
• Does not pollute (null environmental impact);
• Reduces pollution caused by other products (positive environmental impact).
In Fig. 3 some examples of green products with a focus on pollution and the
respective levels of environmental impact during a specific phase are shown.
In particular, a greater attention should be addressed to the third point of each
kind of products, i.e. products with positive environmental impact. In fact, while
other products can be considered ‘green’ as they create less environmental
problems than conventional products, these products contribute to solve environ-
mental problems, which in turn implies a negative environmental footprint and
then a reduction on the environmental footprint due to other products. In this sense,
a green product with positive impact can be considered as an “environmental
helper”. Note that, as the evaluation of the product impact is done with specific
regard to a given focus and phase rather than over the whole life cycle, a product
with a positive impact might not be such over the entire life cycle.
Based on the above we propose the Green Option Matrix (GOM) (Table 2) that
allows green products to be characterized according to the discussed dimensions.
The Green Option Matrix to Characterize Green Products and Practices 199

Table 2 The green option matrix

Environmental focus
Materials Energy Pollution
Life cycle phase ! BU U AU BU U AU BU U AU
Environmental impact Less negative
Null
Positive

4 The GOM Applied to the Upholstered Furniture

and the Footwear Industries

Upholstered furniture and footwear industries represent two important specializa-

tion fields of Italian manufacturing and a relevant part of the whole Italian econ-
omy. However, the growth of emerging countries’ economies significantly
challenges the competitiveness and the existence itself of these two industries in
the developed countries. Under this perspective, green product development might
represent a viable way to pursue a strategy of differentiation. Moreover, developing
green products is increasingly becoming a new trend in these two industries
worldwide (see for instance Albers et al. 2008; Evans 2007).
The GOM is then used to analyze the different features of green products
developed by a sample of companies belonging to upholstered furniture and
footwear industries, showing commitment towards the development of green
products and practices. In particular, the sample companies have been identified
through a web search of relevant keywords.2 Relevant data have been collected
by means of content analysis of companies’ websites and sustainability reports
(e.g. Wolfe 1991; Krippendorf 2004).
In this way, green products and related practices developed by each company in
the sample have been identified and positioned in the GOM. In particular, to this
purpose we developed and used a structured procedure involving three main steps:
step 1, identifying the focus area(s) to which the improved environmental perfor-
mance of the product/practice or the environmental benefits determined by the
product/practice refer; step 2, identifying to which phase(s) of the product life cycle
the improved environmental performance of the product/practice or the environ-
mental benefits determined by the product/practice refer; step 3, identifying the
type of environmental impact of the considered product/practice. These steps are
depicted in Appendix A.

2
Keywords: green sofa (or upholstery or upholstered furniture or shoe or footwear), eco sofa (or
upholstery or upholstered furniture or shoe or footwear), environmental sofa (or upholstery or
upholstered furniture or shoe or footwear), eco-friendly sofa (or upholstery or upholstered
furniture or shoe or footwear), environment-conscious sofa (or upholstery or upholstered furniture
or shoe or footwear), sustainable sofa (or upholstery or upholstered furniture or shoe or footwear).
200 R.M. Dangelico and P. Pontrandolfo

Results are then aggregated by industry, so as to develop a matrix for each

sector, which represents the different undertaken actions.
For the sake of clarity, the tridimensional matrix is presented by means of three
separate matrices, each of which focusing on a specific environmental focus.

4.1 Upholstered Furniture

4.1.1 Environmental Focus ‘Materials’

In Table 3, the GOM filled with green products and practices developed in the
upholstered furniture industry is shown, with a focus on materials.
In the ‘before usage’ phase, companies have reduced their products environmen-
tal impact (‘less negative’), through efficient production processes, in terms of
reduction of water and raw materials use. Specifically, efforts have been made to
reduce size and weight of sofas, therefore at the same time both saving materials
and reducing energy consumption and pollution due to transportation. Some
companies also use water footprint indicators to reduce water consumption. To
have a ‘null’ impact some companies have used materials that are recycled or
natural and coming from renewable sources for sofa frames, coating, filling, or
packaging. Practices adopted by companies that can be conceived as having a
‘positive’ impact are the reuse or recycle of production wastes or by-products that
can then be used to manufacture new products. In the ‘usage’ phase firms have tried
to reduce the environmental impact of sofas by extending their lifecycle, through
the use of highly resistant materials or providing maintenance kits for leather.
Referring to the ‘after usage’ phase, in order to have a ‘null’ impact, actions have
been devoted to use biodegradable materials. In order to have a ‘positive’ impact,
many firms have designed products, components, and packaging to be easily
disassembled (avoiding adhesives), reused and recycled.
The ‘usage’ phase is the one in which fewer actions are identified, especially
with regard to null and positive impacts, leaving then opened for firms opportunities
to explore innovative options.

4.1.2 Environmental Focus ‘Energy’

Table 4 shows the GOM filled with green products and practices developed in the
upholstered furniture industry, with a focus on energy.
With regard to the ‘before usage’ phase, products have been designed to use less
materials, materials requiring little amount of energy to be produced, and/or
materials locally available (‘less negative’ impact). Furthermore, several green
practices have been adopted to make production and transportation processes
more energy efficient (‘less negative’ impact), use renewable energy sources
(‘null’ impact) and generate energy from waste (‘positive’ impact).
The Green Option Matrix to Characterize Green Products and Practices 201

Table 3 Green option matrix for the environmental focus materials in the upholstered furniture
industry
Life cycle phase
Impact Before usage Usage After usage
Less Reduction of sofa’s size Use of materials with –
negative and weight, with a high resistance to
consequent reduction wear, tear, abrasion,
of the coating dirt and characterized
Use of nylon for seat by easy maintenance
fasteners (it is 40 % in (e.g. flakes of
weight derived from polyester fiber,
renewable resources) canovaccio linen,
hemp, ramie, steel
springs)
Use of water footprint Maintenance kit used for
indicator to reduce leather (it allows to
water consumption extend lifecycle of the
Initiatives to promote the sofa)
use of digital
documents and forms
that allow to save paper
and ink
Null Use of natural (e.g. 100 % – Use of biodegradable
natural latex, soy-based materials (e.g.
foam) or recycled bioplastics, natural
materials to fill the sofa fibers, 100 % natural
cushions latex, wood particle
Use of fabrics that are board)
either organic, natural
or made from
renewable plants (e.g.
cotton, linen, silk,
wool, ramie, and jute)
Use of recycled content
fabrics (e.g. ecological
cotton obtained from
recycled T-shirts; fiber
made from plastic
bottles)
Use of recycled steel
constructions
Use of FSC certified wood
for the frame
Use of chipboard frames
Use of recycled material
for packaging
Pieces covered in recycled
truck traps for transport
Use of eco-friendly leather
(continued)
202 R.M. Dangelico and P. Pontrandolfo

Table 3 (continued)
Life cycle phase
Impact Before usage Usage After usage
Use of natural and
renewable materials
(e.g. bamboo,
sustainable Kirei grass
and wheat boards)
Use of vegetable-based
dyes into fabric
Use of Oeko-Tex certified
wool fabric that
employs organic dyes
Use of recycled wires
Positive Use of waste eco-friendly – Use of recyclable materials
leather to manufacture for the frame (e.g.
gloves and keychains tubular aluminum,
chipboard frame)
Recycling of waste Use of recyclable materials
materials (e.g. paper, for packaging (e.g.
plastic, aluminum polyolefin plastic film,
products, wooden cardboard with
frames, cardboards, polypropylene straps
fabrics, trimming, and without the use of
fibers) through a waste adhesive tape)
management company Use of recyclable materials
that distributes raw for coating and filling
materials for use in (e.g. flakes of polyester
other products fiber, goose down,
Donation of virgin foam canovaccio linen, jute,
scarps to local art hemp). For example,
schools or center for moulded polyurethane
autistic children foam parts can be
Unused springs sold as ground up to obtain a
scrap steel mixture for use in
Initiatives to make global low-value sheets (e.g.
cotton production gymnastic mats,
better for people underfelt, footwear),
producing it and for the leather can be ground
environment up and reused for
regenerated leather
products, hemp can be
made into a 100 %
biodegradable plastic.
Recycling of old furniture
in the factory
The Green Option Matrix to Characterize Green Products and Practices 203

Table 4 Green option matrix for the environmental focus energy in the upholstered furniture
industry
Life cycle phase
Impact Before usage Usage After usage
Less Reduction of the coating (this requires less energy for – Use of tubular
negative processing) aluminum
Use of the raw materials that are available close to the for the frame
manufacturing plant (this reduces energy (it requires
consumption due to transportation) little amount
Use of soy-based foam (which requires little amount of of energy to
energy to be produced) be recycled)
Use of canovaccio linen (it is produced with very low
energy consumption)
Initiatives to reduce the use of paper (and consequently
of the energy employed to print documents and
forms)
Reduction of electricity consumption (e.g. pressure on
air compressors turned down, weather stripping
panels installed on loading docks, lights turned off
when not in use, use of natural light as much as
possible)
Initiatives to optimize transportation loads, thereby
reducing the number of trips and the total energy
consumption (e.g. use of flat packs, transportation of
sofas packaged disassembled)
Null Use of energy from renewable sources to provide power – –
to machines (e.g. solar panels and windmills)
Positive Incineration of wastes to obtain energy (e.g. thermal – –
destruction of ecological polyurethane in modern
incinerators; the heating system for wood frame
factory and fuel for wood-drying kilns is generated
by burning scrap wood and sawdust)

With regard to the ‘usage’ phase no products and practices have been identified. This
may be due to the fact that sofas do not use energy during the usage phase. However,
this may also represent an innovation opportunity area to be explored for companies.
In the ‘after usage’ phase it can be mentioned the use materials requiring little
amount of energy to be recycled.

4.1.3 Environmental Focus ‘Pollution’

Table 5 shows the GOM filled with for green products and practices developed in
the upholstered furniture industry, with a focus on pollution.
In the ‘before usage’ phase, most practices are developed to reduce emissions
due to production and transportation (‘less negative’ impact) and with attention to
avoid the use of toxic substances (‘null’ impact).
204 R.M. Dangelico and P. Pontrandolfo

Table 5 Green option matrix for the environmental focus pollution in the upholstered furniture
industry
Life cycle phase
Impact Before usage Usage After usage
Less Use of raw materials that are Use of wood panels with –
negative available close to the lowest class of
manufacturing facility (this formaldehyde emission
reduces emissions due to
transportation)
Use of carbon footprint
indicator for each sofa
Reduction of HAPs and VOCs
by switching from
duplication of fluid used in
making fabric cutting
patterns to use of plotters
and recycled paper
Use of paints and coatings with
the lowest possible VOCs
Use of components whose
manufacturing does not
emit CFCs
Initiatives to optimize
transportation loads,
thereby reducing the
number of trips and CO2
emissions (e.g. use of flat
packs, transportation of
sofas packaged
disassembled)
Null Tanning processes free from Use of materials that are Use of goose
harsh chemicals or metal non-toxic and do not have down (it does
irritating effects on human not pollute)
skin, such as allergic
reactions (e.g. organic or
natural cotton, ecological
polyurethane, 100 %
natural latex)
Use of vegetable-based dyes Water and neutral white soaps Use of foam
into fabric to clean the sofa (they have containing
no environmental impact) organic
Use of organic cotton (it is Use of Oeko-Tex certified halogen-free
cultivated using methods wool fabric that employs retardants
that do not require genetic organic dyes
engineering and the use of
toxic elements such as
pesticides)
Use of ecological polyurethane Use of foam containing organic
foam that does not contain halogen-free retardants
Freon or other blowing
agents
(continued)
The Green Option Matrix to Characterize Green Products and Practices 205

Table 5 (continued)
Life cycle phase
Impact Before usage Usage After usage
Use of 100 % natural latex (the Use of hemp (this fabric it is
only blowing agent used for naturally non-toxic and
the production of latex pest-resistant)
foam is air; avoidance of
CFCs emissions)
Use of foam whose production
process is free of ABAs,
CFCs and auxiliary CO2
Use of water-based glues and
adhesives with no VOCs
emissions
Use of solar energy to provide
clean power to machines
(reduction of GHGs
emissions)
Elimination of toxins in the
work environment
Use of aspiration’s cabins in
the department of bonding
to defend the health and the
welfare of workers
Use of flakes of polyester fiber
(not harmful in any stage of
production and assembly)
Use of totally chlorine-free
paper
Positive – Use of ecological polyurethane –
foam (it does not attract or
generate dust; it is resistant
to insects and parasites; it is
bacteriostatic and
bactericidal; it is washable
and sterilizable)
Use of flakes of polyester fiber
(it does not allow the
development of bacteria
and mould)

In the ‘usage’ phase, we can mention actions undertaken to make products safe
for the human health, through the use of materials with low levels of emissions
(‘less negative’ impact), non-toxic and non-irritating (‘null’ impact), and that do not
attract or generate dust, resist to insects and parasites and/or are bacteriostatic and
bactericidal (‘positive’ impact).
In the ‘after usage’ phase it can be mentioned the use materials that do not
pollute when disposed.
206 R.M. Dangelico and P. Pontrandolfo

4.2 Footwear Industry

4.2.1 Environmental Focus ‘Materials’

In Table 6, the GOM filled with green products and practices developed in the
footwear industry is shown, with a focus on materials.
Most of the companies’ efforts seem to be focused in the before usage phase. The
environmental impact is reduced (‘less negative’) by means of reduction of raw
materials use or adoption of raw materials that require lower water consumption to
be produced. Also, manufacturing processes are adopted that reduce the water
consumption or the waste generation. Efforts are carried out to reduce the packag-
ing size as well. Some companies also resort to material sourcing from sustainable
suppliers (such suppliers undergo an environmental audit concerning all environ-
mental focuses, which is why this practice is reported in the energy and pollution
tables below, as well). In the same lifecycle phase, companies pursue a ‘null’
environmental impact by using several different types of renewable or recycled
materials for both the product and packaging. In some cases the null impact is
achieved through the use of wood coming from sustainable managed forests.
Practices that can be conceived as having a ‘positive’ impact concern the reuse or
recycle of raw materials and wastes as well as the use of natural fibers that involve
benefits for the ground where they are cultivated.
In the ‘usage’ phase, the study has identified the use of natural materials for shoe
parts that are in contact with the skin as a practice characterized by a ‘null’ impact.
The use of particular fibers that involve benefits for the skin of the persons wearing
the shoes has been recognized as having a ‘positive’ impact.
Referring to the ‘after usage’ phase, biodegradable or compostable packaging is
classified as a practice characterized by a ‘null’ impact. Companies positively
contribute to the environment (‘positive’ impact) by resorting to reusable packaging
or ways to make the product recyclable. Among the practices presenting a ‘positive’
impact in the ‘after usage’ phase, there is also the implementation of programs
aimed at converting, recovering and recycling post-consumer packaging, products
or components.

4.2.2 Environmental Focus ‘Energy’

Table 7 shows the GOM filled with green products and practices developed in the
footwear industry, with a focus on energy.
The analysis on the energy focus could ascertain practices characterized by
either a less negative or a null environmental impact. In the ‘before usage’ phase,
companies implement actions aimed at reducing the energy consumption of pro-
duction processes, or increasing the efficiency of energy generation systems, or
optimizing transportation, or reducing size or weight of packaging (all of these
The Green Option Matrix to Characterize Green Products and Practices 207

Table 6 Green option matrix for the environmental focus materials in the footwear industry
Life cycle phase
Impact Before usage Usage After usage
Less Reduction of products and – –
negative packaging size
Reduction of raw materials
use
Reduction of waste
generation in
manufacturing
processes
Reduction of water use in
manufacturing
processes
Use of Kenaf, which
requires a minimum
amount of water in
comparison to
conventional row crops
Material sourcing from
sustainable suppliers
(e.g. leather from
tanneries that have
achieved Silver or
Gold rating with regard
to environmental
sustainability)
Null Use of renewable Use of natural materials Biodegradable or
materials (organic for shoe parts that are compostable
cotton, gum rubber, in contact with the skin packaging
rice husks, bamboo,
hemp, cork)
Use of lenpur, which is a
material made from
wood coming from
sustainably managed
forests
Use of recycled plastic
(e.g. plastic from
recycled soda bottles
used for durable
shoelaces)
Soles made from recycled
tires
Use of recycled materials
for packaging (e.g.
leaflets made in
recyclable cardboard)
Positive Use of kenaf, which is a Use of fibers that, thanks Reusable packaging
material that enables to the adding of
(continued)
208 R.M. Dangelico and P. Pontrandolfo

Table 6 (continued)
Life cycle phase
Impact Before usage Usage After usage
ground to be weeds- seaweed, promotes the Recyclable products
free after cultivation remineralization of the (e.g. bionic canvas,
making it softer skin as well as involves green rubber)
Process that converts scrap anti-inflammatory Programs to convert,
rubber into a recycled effects recover and recycle
compound reusable in post-consumer
rubber products packaging, products or
Reuse and/or recycle of components (e.g. from
raw materials and the rubber in a running
wastes track to the carpet
padding)

present a ‘less negative’ impact). In several cases we identified the use of renewable
energy sources in production processes (‘null’ impact).
Finally, with respect to the ‘after usage’ phase, we identified efforts for using
products or packaging that can be recycled with high-energy efficient processes
(‘less negative’ impact) or reused without requiring any processing (‘null’ impact).

4.2.3 Environmental Focus ‘Pollution’

Table 8 shows the GOM filled with for green products and practices developed in
the footwear industry, with a focus on pollution.
With regard to the focus on pollution, the analysis highlights that almost all
green practices concern the ‘before usage’ phase, with the only exception being the
use of adhesive products made from water (‘null’ impact in the after usage phase).
The reduction of toxic substances use in raw material processing and product
manufacturing, transportation emissions, and water consumption are the practices
characterized by a ‘less negative’ impact. The elimination of chemicals, hazardous
wastes, and chromium and similar heavy metals are the ascertained efforts
characterized by a ‘null’ impact. Finally, the use of kenaf is classified as having a
‘positive’ impact, as kenap crops can absorb smog.

5 How Companies Can Put the GOM into Practice

The green option matrix can be used by companies as a market analysis tool to
study competitors’ green product offering and as a communication tool for public
relations activities. If the purpose of the matrix is conducting a market analysis of
The Green Option Matrix to Characterize Green Products and Practices 209

Table 7 Green option matrix for the environmental focus energy in the footwear industry
Life cycle phase
Impact Before usage Usage After usage
Less Low energy consuming production – Products or packaging that can be
negative processes (e.g. lean energy mapping recycled with high-energy
processes) efficient processes
Material sourcing from sustainable
suppliers (e.g. leather from tanneries
that have achieved Silver or Gold
rating with regard to environmental
sustainability)
Transport optimization
Use of more efficient energy generation
systems in production processes
Size and weight reduction of packaging
(e.g. lighter and smaller shoeboxes)
Null Use of renewable energy sources in – Products or packaging that can be
production processes reused without any process
Positive – – –

competitors’ green products offering, first, a market analyst should identify the
company’s main competitors as well as their green products, then, an environmen-
tal expert, able to recognize these products’ environmental focus, phase of life
cycle, and type of impact, should position them in the matrix. The positioning of
green products and practices of a sample of companies belonging to the upholstered
furniture and footwear industries indeed represents an example of the use of the
matrix as a market analysis tool. The matrix filled out with competitors’ green
product offering could then be taken into account by the top management, for
decisions making about the green product portfolio management. For example, a
company can decide the share of new products with environmental features similar
to the ones of competitors’ products, as well as the share of more innovative green
products. In the former case new products would be positioned in already filled cells
of the matrix deriving from the market analysis, in the latter case these products
would be positioned in empty cells.
If the purpose of the matrix is to communicate to stakeholders the company’s
environmental efforts, first, managers knowledgeable about environmental perfor-
mance of products and processes (e.g. head of environmental management/affairs
or head of HSE management) should position in it the company’s green products
and practices. Then, people in charge of public relations should further elaborate
the matrix to make it more easily readable and understandable by stakeholders. We
suggest such a matrix to be included in the company’s environmental/sustainability
report.
Despite the above discussed benefits, it is not straightforward to identify to
which cell of the GOM a given real product/practice should be assigned. To support
companies in this task we further detailed the procedure reported in Appendix A as
210 R.M. Dangelico and P. Pontrandolfo

Table 8 Green option matrix for the environmental focus pollution in the footwear industry
Life cycle phase
Impact Before usage Usage After usage
Less Reduction of toxic substances use in raw material – –
negative processing and product manufacturing
(reduction of pesticide use; reduction in the use
of chemical and hazardous materials; reduction
in consumption of solvents)
Reduction of emissions due to transportation
(lighter and smaller packaging; selection of
geographically close fabric suppliers;
optimization of logistics processes)
Use of Kenaf, which requires a much lower
amounts of fertilizers and pesticides, in
comparison to conventional row crops
Material sourcing from sustainable suppliers (e.g.
leather from tanneries that have achieved Silver
or Gold rating with regard to environmental
sustainability)
Null Elimination of chemical substances (e.g. glues with – Use of adhesive
direct injection onto uppers) products made
Elimination of hazardous wastes from water
Manufacturing processes that do not use chromium
or other heavy metals (e.g. white tanning)
Positive Use of Kenaf, which absorbs smog during – –
cultivation

a checklist (Appendix B), benefiting from the analysis conducted in the two
industries. Specifically, after the detailed screening of the implemented products
and practices, we characterized them according to the environmental impact (less
negative, null, positive), then developed a short general description of any group of
products (practices) recognized as similar, finally used such a description as an item
of the checklist, which a company can easily use as a reference to position actual
products (practices).

6 Discussion and Conclusion

This paper has stressed that despite several definitions and classifications of green
products, an integrated characterization seems to be still lacking in the literature. In
fact, most of the contributions available in the literature generally put emphasis on
single aspects that can be associated with the greenness of a product. In particular,
this paper has explicitly recognized a specific type of green products, which
previous tools (such as the Ecodesign matrix) do not highlight: products
contributing to the improvement of the environment. We define such products as
having a positive impact in that they reduce the environmental impact of other
products.
The Green Option Matrix to Characterize Green Products and Practices 211

A new dimension to better characterize green products has then been introduced,
“type of environmental impact”. It can assume three different levels, i.e. less
negative, null, and positive, whose meaning is slightly different according to each
of the three environmental focus (materials, energy, and pollution). A Green Option
Matrix (GOM) has been developed to integrate this new dimension with environ-
mental focus (materials, energy, and pollution) and life cycle phase (before usage,
usage, and after usage).
The GOM has then been used to analyze and characterize green products and
practices developed by a sample of companies belonging to the upholstered furni-
ture and footwear industries.
Several questions were posed at the beginning of this paper. First, we raised the
point about why very different products, becoming more and more widespread in
the market (such as hybrid cars, recycled products, photovoltaic cells, and
bioplastics to name a few), can be claimed as ‘green’. Our study, by helping to
structure the knowledge about products’ environmental features, highlights the
multi-facets features of ‘greenness’ and provides us with a roadmap to understand
commonalities and differences among several types of green products.
Another question we raised was related to practices that should be implemented
by companies willing to develop green products. By conducting an analysis of
green products and practices developed by a sample of companies belonging to the
upholstered furniture and footwear industries, and positioning them in the GOM,
we suggest a wide range of options that could be implemented by companies that
are starting to shift towards more sustainable business models. Due to a rapid
increase of the public interest towards environmental issues, companies are feeling
more and more in duty bound to communicate to stakeholders their environmental
efforts. While several guidelines exist for reporting overall firms’ environmental
performance (see for instance the Global Reporting Initiative), similar tools have
not been developed for products. Of course, the environmental excellence of
products can be communicated through eco-labels or in terms of LCA results.
However, not for all product categories eco-labels exist (think of products related
to the production of renewable energy), and, when available, they generally give a
synthetic indication of high environmental performance, without providing a
detailed picture of the different types of environmental focus, impact, or life
cycle phase that the product addresses. On the other hand, communicating LCA
results could be misleading for customers if producers of competitive products do
not do the same. The GOM may thus represent a suitable way for firms to
communicate environmental features of their green products.
This study has several implications for companies. The GOM, in that helps
structure the knowledge about green products and practices (referable to a single
company as well as to a whole sector), may represent a useful tool for companies
that want to develop green products. In particular, the value of this matrix can be
twofold: (i) as a market analysis tool, helping companies to analyze competitors’
green products and practices, so providing tangible directions to green their
products, as well as suggesting directions to be explored, by identifying areas
wherein green products or practices have yet to be developed (empty cells of the
212 R.M. Dangelico and P. Pontrandolfo

GOM); in this sense the GOM can support green product portfolio management;
(ii) as a communication tool, helping companies in their communication strategies
to stakeholders about the environmental impacts of their products or practices (in
particular we suggest the filled out GOM to be included in a company’s environ-
mental/sustainability report). It should be noticed that, since the use of the GOM as
a communication tool helps companies to be specific in their green claims (the
GOM forces a company to explicit the when, why, and how much), it prevents them
from making general claims of ‘ecological’, ‘green’, sustainable’ products, so
reducing the risk of green washing.
Among the possible limitations of our study, we would stress that the GOM is
not proposed as a tool to assess the environmental impact of products. In fact, a
careful evaluation of a product environmental impact would require the use of life
cycle assessment tools and should take into account the conditions of use of the
product itself as well as external factors, such as the state of the ecosystem, which
may affect its impact. The proposed approach is indeed qualitative in terms of the
estimated environmental impact as well as referred to specific phases and specific
types of environmental focus, rather than quantitative and measured over the entire
life cycle. Such an approach has been adopted since it is coherent with the main
purpose of our study, which is to offer an easy tool to managers for green product
market analysis and communication. Methodologies and tools for a quantitative
assessment of the environmental impact (such as LCA software) are already
available and out of the scope of this study.
Furthermore, even though we developed the checklist to the best of our knowl-
edge and analyzing companies recognized as sustainability leaders, we cannot
exclude that additional items should be added to it, as a result of the technological
progress as well as the existence of green products and
The Green Option Matrix to Characterize Green Products and Practices 213

Appendix A

STEP 1 Identify focus area

materials energy pollution/

toxic waste

STEP 2 Identify life cycle Identify life cycle Identify life cycle
phase phase phase

B.U.
D.U. A.U. B.U. D.U. A.U. B.U. D.U. A.U.

Id. type Id. type Id. type Id. type Id. type Id. type Id. type Id. type Id. type
STEP 3 of impact of impact ofimpact of impact of impact of impact of impact of impact of impact

Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos. Less Null Pos.
neg. neg. neg. neg. neg. neg. neg. neg. neg.

Steps to characterize green products and practices

Appendix B

CHECKLIST to guide the characterization of green products and practices

• STEP 1
In which one(s)3 of the following focus areas does the product/practice display
improved environmental performance compared to industry standards or
determines environmental benefits?
• Materials (including water) ! go to the section ‘materials’
• Energy ! go to the section ‘energy’
• Pollution/toxic waste ! go to the section ‘pollution/toxic waste’

Section ‘Materials’

• STEP 2
In which phase(s) of the product life cycle does the product/practice display
improved environmental performance compared to industry standards or
determines environmental benefits?

3
Note that more than one choice is possible for steps 1 and 2. In such cases, all the related sections
need to be considered.
214 R.M. Dangelico and P. Pontrandolfo

• Before product usage ! go to the section ‘before product usage’

• During product usage ! go to the section ‘during product usage’
• After product usage ! go to the section ‘after product usage’

Before Product Usage

• STEP 3
Select the description that better reflects the product or practice and derive the
corresponding type of impact.

Corresponding type of
Product or practice description impact
Eco-efficient production processes Less negative
Reduction of product or packaging’s size and weight Less negative
Use of recycled materials for product or packaging Null
Use of materials not containing harmful or toxic substances for product or Null
packaging
Use of renewable materials for product or packaging Null
Use of environmentally certified raw materials for product or packaging Null
Production waste recycling/reuse Positive
Production water recycling/reuse Positive

During Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Product with extended lifecycle/high durability Less negative
Eco-efficient products, requiring/allowing the use of less materials Less negative
Products using renewable raw materials (where competitive products use Null
non renewable ones)
Products that during use are in contact with peoples’ skin and are made of Null
natural/certified materials
Products allowing to extend lifecycle of other products Positive
The Green Option Matrix to Characterize Green Products and Practices 215

After Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Product or packaging partly made of biodegradable materials Less negative
Product or packaging partly made of recyclable materials Less negative
Product or packaging completely made of biodegradable materials Null
Product or packaging completely reusable, remanufacturable, or Positive
recyclable

Section ‘Energy’

• STEP 2
To which phase(s) of the product life cycle the improved environmental perfor-
mance of the product or the environmental benefits determined by the product
refer?
• Before product usage ! go to the section ‘before product usage’
• During product usage ! go to the section ‘during product usage’
• After product usage ! go to the section ‘after product usage’

Before Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Products requiring less energy to be produced or installed Less negative
Reduction of product or packaging’s size and weight Less negative
Use of practices reducing energy consumption in production plants Less negative
Transport optimization Less negative
Use of more efficient energy generation systems in production processes Less negative
Use of renewable energy sources in production processes Null
Use of cogeneration plants to provide electricity, heating, and cooling in Positive
production processes
Generating energy from exhaust hot gas/waste in production processes Positive
216 R.M. Dangelico and P. Pontrandolfo

During Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Energy efficient products, attachments, components Less negative
Size and weight reduction of products used for transport Less negative
Thermal insulating products/materials Less negative
Energy conserving products Less negative
Products working through energy coming from renewable sources by Null
themselves generated
Products increasing energy generation efficiency Positive
Products generating energy from renewable energy sources Positive

After Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Products or packaging that can be recycled with high energy efficient Less negative
processes
Reusing products or packaging without any processing Null
Waste products recyclable into fuel Positive

Section ‘Pollution/Toxic Waste’

• STEP 2
To which phase(s) of the product life cycle the improved environmental perfor-
mance of the product or the environmental benefits determined by the product
refer?
• Before product usage ! go to the section ‘before product usage’
• During product usage ! go to the section ‘during product usage’
• After product usage ! go to the section ‘after product usage’
The Green Option Matrix to Characterize Green Products and Practices 217

Before Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Reduction of emissions in production processes Less negative
Reduction of emissions due to transportation Less negative
Use of renewable energy sources in production processes Null
Avoidance of the use of hazardous materials and chemicals in production Null
processes
Redevelopment of brownfield land/cleaning up of contaminated sites Positive
Transforming production waste in fuel Positive

During Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Energy efficient products, attachments, components Less negative
Size and weight reduction of products used for transport Less negative
Products with reduced electromagnetic waves emissions Less negative
Products reducing pollution/release of toxic substances during their use Less negative
Products avoiding pollution/release of toxic substances during their use Null
Products avoiding/reducing pollution/release of toxic substances of other Positive
products

After Product Usage

• STEP 3
Select the description that better reflects the product or practice:

Corresponding type of
Product or practice description impact
Products with reduced amount of toxic substances – e.g. CFCs, Less negative
radioactive materials, PVC – (thus generating a reduced amount of
toxic waste)
Products avoiding the use of toxic substances (thus not generating toxic Null
waste)
Products that reduce the pollution in the environment wherein disposed Positive
218 R.M. Dangelico and P. Pontrandolfo

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Sustainability Measurement and Reporting:
Impacts on Finance, Stakeholders
Communication and Internal Measurement
Practices

Paolo Taticchi

1 Introduction

Declining ecosystems, limited natural resources, population growth and increasing

economic disparity have pushed the sustainability debate significantly in the last
decade. However, attention to environmental and social needs originates back to the
late 80s, as confirmed by the popular notion of “sustainable development” (United
Nations 1987) that states: “development that meets the need of the present without
compromising the ability of future generations to meet their own needs”.
Further, the world financial crisis, accounting and remuneration scandals, and
suspicion about the social and environmental implications of businesses have led to
growing demand for transparency about corporate behavior on a whole range of
issues (Kolk 2008). In this context, sustainability has become an often-mentioned
goal of businesses, nonprofits and governments, that being part of the problem
origin can become part of the problem solution.
Edwards (2005) identifies in this the so called “sustainability revolution”.
In fact, in the business “as usual” approach, environmental concerns are seen as
an impediment to business success, regulatory compliance is viewed as simply
another cost of doing business, and, therefore, in order to avoid compromising

Measurement is the base of management; reporting is the base of communication. This paper
explores how the topic of sustainability if affecting traditional business activities in terms of
measurement and reporting practices. Perspectives investigated include: finance and
investments, stakeholders communication and engagement, internal measurement and
management systems. Emerging frameworks related to these perspectives are presented and
discussed. The picture that appears is a strong impact of the sustainability topic, and a
significant evolution of the traditional performance measurement and reporting practice.
P. Taticchi (*)
Royal Docks Business School, University of East London, London, UK
e-mail: [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 221
DOI 10.1007/978-3-642-37018-2_10, © Springer-Verlag Berlin Heidelberg 2013
222 P. Taticchi

profits, the prevailing attitude is to meet only the minimum compliance

requirements.
Instead, under the effects of the “sustainability revolution”, sustainable
practices, in lieu of being seen as an impediment to business development, are
seen as business opportunities.
A quoted definition of corporate sustainability is that of Dow Jones Sustainability
Indexes (2012): “a business approach that creates long-term shareholder value
by embracing opportunities and managing risks deriving from economic, environ-
mental and social developments”. Such a definition leads directly to the three pillars
of sustainability, that are the economical, social and environmental dimensions.
The concept of sustainability is therefore close the concept of “quality of life”.
The shared choice of accepting the sustainability concept as composed of the three
before mentioned dimensions, led to another widely adopted idea, which is the
“Triple Bottom Line”. Such a paradigm, manifests the need of evolving traditional
frameworks and measuring criteria forward new models able to understand and
relate economical, social and environmental performances which have equal bal-
ance. Bonacchi and Rinaldi (2007) provide a comprehensive picture of the strengths,
weaknesses and issues of Triple Bottom Line (TBL) approach.
TBL has become the main inspiration of today well-established accredited
organizations that provide international reporting frameworks such as the Global
Reporting Initiative (GRI) and the International Federations of Accountants
(IFAC). However, there is neither a universal standard method for computing the
TBL nor a universally accepted standard for the measures that comprise each of the
three TBL categories.
Similarly to the topic of sustainability, interest on performance measurement and
reporting has notably increased in the last 20 years (Taticchi and Balachandran
2008). Particularly, it is important to note the evolution of focusing performance
from a financial perspective to a non-financial perspective. Companies have under-
stood that for competing in continuously changing environments, it is necessary to
monitor and understand firm performances. In this context, economic, environmen-
tal and social performance of firms needs to be understood, managed and properly
disclosed to external stakeholders. Moreover, measurement has been recognized as
a crucial element to improve business performance (Sharma et al. 2005). As a
consequence of that, proper measurement and reporting (M&R) frameworks can
facilitate the comprehension of sustainability drivers, the management of processes
and the communication/engagement to/with stakeholders, and therefore lead to
superior sustainability performance and competitive advantage.
Although extensive research has been carried out to investigate the needs and
characteristics of performance measurement frameworks for large organizations,
there is a distinct lack of published research on the role performance measurement
and reporting tools can play in order to support sustainability projects.
This paper, based on the comprehension of relevant literature and evidences from
business practices, highlights the impacts of sustainability on three related areas:
1. Finance and investments;
2. Stakeholders communication and engagement;
3. Internal measurement and management systems;
Sustainability Measurement and Reporting: Impacts on Finance, Stakeholders. . . 223

2 The Impacts of Sustainability

2.1 Sustainability Impacts on Finance and Investments

M&R Practices

Epstein (2008) identifies two major impacts of sustainability on finance/investment

practices:
1. It aims to increase long-term shareholder value;
2. Sustainability leaders are increasingly expected to show superior performance
and favourable risk/return profiles.
Such a forecasts from the academic literature find reality in markets: a recent
report released by investment bank Goldman Sachs found that companies that are
considered leaders in environmental, social and governance (ESG) policies are also
leading the pack in stock performance, by an average of 25 % (United Nations
Global Compact 2012).
As a consequence of this, concepts like Corporate Social Responsibility (CSR)
and Environmental, Social and Governance (ESG) are spreading through the
normal language of bankers, investors and companies.
Firms are developing their own frameworks to analyze sustainability perfor-
mance of companies, and optimize investments in the short and long term. Within
this context, the “GS Sustain” framework developed by Goldman Sachs is well
established (Goldman Sachs 2012).
Another important evidence, is the development and consistency of
sustainability-financial indexes. Among these, the most popular is doubtless the
“Dow Jones Sustainability Index (DJSI)”. The Dow Jones Sustainability Indexes
are the first global indexes tracking the financial performance of the leading
sustainability-driven companies worldwide. Based on the cooperation of Dow
Jones Indexes and SAM they provide asset managers with reliable and objective
benchmarks to manage sustainability portfolios (Dow Jones Sustainability Indexes
2012). Today, approximately 60 DJSI licenses are held by asset managers in
16 countries to manage a variety of financial products including active and passive
funds, certificates and segregated accounts. In total, these licensees presently
manage over eight billion USD based on the DJSI (Dow Jones Sustainability
Indexes 2012). The underlying research methodology accounts for general as
well as industry-specific sustainability trends and evaluates corporations based on
a variety of criteria including climate change strategies, energy consumption,
human resources development, knowledge management, stakeholder relations and
corporate governance (Dow Jones Sustainability Indexes 2012). Figure 1 presents
the framework at the base of DJSI corporate sustainability assessment.
Every year, DJSI invites the 2,500 largest companies (in terms of float-adjusted
market capitalization from all industries within the Dow Jones Global Total Stock
Market Index) to participate the assessment. The last is carried out through a
224 P. Taticchi

SAM’s DJSI Design

Corporate Sustainability Commitee
Assessment

SAM’s
Questionnaire
DJSI
Starting
Construction DJSI Family
Universe Media & Process
Stakeholder
Analysis

Continuous
Sources of Information
Monitoring

assessment.jpg

Assurance Process

Fig. 1 DJSI framework for corporate sustainability assessment (Source: Dow Jones Sustainability
Indexes 2012)

questionnaire consisting of about 80–120 questions on TBL issues, both generic

and sector-specific. Assurance on disclosure by verifying companies’ answers with
the supporting documentation they provide, by controlling publicly available infor-
mation and published company reports. Further, to ensure quality and transparency
of the assessment process itself, an independent external audit on the assessment
process is carried out every year by Deloitte consulting firm. Based on collection
and analysis of questionnaire results, companies are therefore ranked on a sector
basis and indexes are built with reference to sector, performance and geography
parameters. As example, Table 1 presents the “Global Supersector Leaders” of
2012.
The increasing interest for sustainability in the finance sector is driving the
growth of new data and indexes providers. Among these, it’s important to mention
Bloomberg that today provides ESG data for more than 5,000 worldwide
companies (Bloomberg 2012).

2.2 Sustainability Impacts on Stakeholders Communication

and Engagement M&R Practices

Stakeholders play a crucial role in today business activities. However, different

stakeholders are interested (and influence) in different aspects of business
sustainability. For instance, shareholders are mainly interested on financial infor-
mation, risk issues and corporate governance as a consequence of their interest in
maximizing profit return. Employees are interested instead in labor policies, remu-
neration practices and working environments, so as to feel safe and guaranteed
during their working services. Customers, as market judges, are interested in a
broad range of issues that include product safety, environmental and social impacts
Sustainability Measurement and Reporting: Impacts on Finance, Stakeholders. . . 225

Table 1 DJSI world, Global Supersector Leaders 2012 (Adapted from Dow Jones Sustainability
Indexes 2012)
Company Sector Country
Bayerische Motoren Werke AG (BMW) Automobiles & Parts Germany
Australia & New Zealand Banking Group Ltd Banks Australia
UPM-Kymmene OYJ Basic Resources Finland
Akzo Nobel NV Chemicals Netherlands
GS Engineering & Construction Corp Construction & Materials South Korea
Itausa – Investimentos Itau SA Financial Services Brazil
Unilever NV Food & Baverage Netherlands
Roche Holding AG Health Care Switzerland
Siemens AG Industrial Goods and Services Germany
Swiss Re Insurance Switzerland
Telenet Group Holding NV Media Belgium
Repsol SA Oil & Gas Spain
Koninklijke Philips Electronics N.V. Personal & Household Netherlands
GPT Group Real Estate Australia
Lotte Shopping Co. Ltd. Retail South Korea
Alcatel-Lucent SA Technology France
KT Corp. Telecommunications South Korea
Air France-KLM Travel & Leisure France
Iberdrola SA Utilities Spain

of production activities, after-sale services. All these issues and areas of interest fit
in the sustainability landscape.
Traditional measurement and reporting practices have addressed only partially
these needs. In this context, for example, traditional financial reports are not
anymore sufficient for addressing shareholders request of information. “One
Report”, popular book by Eccles and Krzus (2010) has set the ground for a new
approach to corporate reporting and more generally disclosure to stakeholders.
Within this context, relevant change is driven by two aspects:
1. Need of an integrated approach to reporting based on triple bottom line
information;
2. Shift from stakeholders’ communication (one flow communication) to
stakeholders’ engagement (two flows communication).
The last aspect, is particularly relevant and affecting significantly business
practices.
In fact, in order to increase quality and transparency of information, companies
are today requested to identify relevant stakeholders, and engage them in order to
understand what kind of information divers stakeholders ask to disclosure.
This process of engagement is not easy, and required strong commitment as well
as the capability of using all kind of tools and technologies, particularly those
offered by the Web 2.0.
226 P. Taticchi

Good examples of these new practices are found for example in Avon, the
cosmetic company, that engages its associates through the use of global intranets,
regional newsletters and surveys; or large retailer Wal-Mart, that engages
stakeholders largely through the use of social networks such as Facebook, Youtube
and Twitter.
Regarding the first aspect, related to integrated reporting, a number of reporting
frameworks are leading the scenario. Among these, it is a must to mention the
Global Reporting Initiative (GRI), the Carbon Disclosure Project and the UN
Global Compact.
The GRI is a not for profit network-based organization involving some 30,000
experts of different kind of organizations. Funded in 1997, it results from the
collaboration of CERES (Coalition for Environmentally Responsible Economies)
and UNEP (United Nations Environment Program). Promoters of the concepts of
integrated reporting (so as to integrate financial, environmental, social and gover-
nance performance), GRI launched in 2000 the first version of its “Guidelines”
(today at the third generation).
The GRI’s framework consist of the “Sustainability Reporting Guidelines”, the
“Sector Supplements”, the “National Annexes” and the “Boundary and Technical
Protocols” (GRI 2012).
The sustainability reporting guidelines provide guidance for defining report
content, quality and boundary as well as indication for standard elements of
disclosure, that include strategy and profile of the organization, and standard
indicators related to economic, environmental and social performance. The social
dimension covers labor practices, human rights, society and product responsibility.
In terms of content and quality of the report, the GRI framework is based on ten
principles that are: materiality, stakeholder inclusiveness, sustainability context,
completeness, balance, comparability, accuracy, timeliness, clarity and reliability.
The requested number of sustainability performance indicators to be disclosed
depends on the desired level of application (three levels of disclosure are identified
namely A, B and C) and eventual certification by third parties (A+, B+ and C+).
The need of sector-specific disclosure is addresses by the sector supplements,
which identify key sustainability impacts and related performance indicators for
12 industries including construction and real estates, electric utilities, financial
services, oil and gas and media. Similarly, national annexes provide guidelines
for capturing national and regional sustainability issues. Last, boundary and tech-
nical protocols provide information for ensuring materiality and quality of infor-
mation to be disclosed on reports.
Today, more then 4,900 organizations have adopted the GRI Guidelines (GRI
2012) as the base of their integrated reporting, and the framework is becoming
popular also in the SME (Small and Medium Enteprises) environment. Success of
the GRI framework can be probably identified in the “multistakeholder approach”,
that represents the shared process of the guidelines’ design that has seen a strong
collaboration of governments, companies and universities.
Similarly to the GRI, the Carbon Disclosure Project (CDP) is based on a multi-
stakeholder approach and offers a framework for assessing the impacts of business
Sustainability Measurement and Reporting: Impacts on Finance, Stakeholders. . . 227

activities with a focus on environmental issues (mainly carbon and water issues).
Companies are therefore assessed based on o questionnaire, that evaluates manage-
ment, climate change risk & opportunities, emissions and other relevant informa-
tion. Based on data collected, a score methodology developed by
PricewaterhouseCoopers LLP is then applied for assessing organizations. In order
to demonstrate a strong interest on sustainability and the importance of
sustainability disclosure, the CDP groups 655 institutional investors that allocated
$ 78 trillions for investments in companies that show superior sustainability perfor-
mance (Carbon Disclosure Project 2012). This highlights again the connection
between sustainability reporting and the finance world. Indexes are also available
for evaluating “Carbon Disclosure Leadership” and “Carbon Performance
Leadership”.
Finally, the UN Global Compact framework is probably the most popular (due to
his flexibility and low level of requirements), since identifies 10 principles for
disclosure over four areas, that include: human rights, labour, environment and
anti-corruption (see Fig. 2). Basic guidelines are provided to companies for
reporting on these ten areas in a flexible way.

2.3 Sustainability Impacts on Internal Measurement

and Management Systems

Organizations are involved in measuring the sustainability of their business with

mainly three goals: communicating and engaging stakeholders, improve operations
and align people to strategies. The pursuit of these three objectives is often
disconnected, leading to the achievement of different systems and reporting
techniques. Frameworks presented in the previous paragraph such us the GRI
represent the effort of converging forward a unique standard approach to measure-
ment/reporting but evidence from reality confirms that this is goal is still fare to
reach. Further, doubt has been raised about the consistency and effectiveness of
such a sustainability reports, which appear useful for external communication, but
often not practical for management aiming at business sustainability control and
improvement (Brunklaus et al. 2008).
A comprehensive analysis of emerging systems for measuring business
sustainability can be carried out by looking at two aspects: first, the impact of
sustainability on performance measurement indicators and second, the impact on
performance measurement frameworks.
Traditional performance measurement and management (PMM) literature
distinguishes between two basic classes of performance indicators: strategic (or
managerial) performance indicators and operational performance indicators. The
majority of emerging literature on sustainability measurement agrees on this dis-
tinction, and locates sustainability indicators in one of the two categories. The
228 P. Taticchi

Fig. 2 Principles of the UN Global Compact framework (Source: United National Global
Compact 2012)

remaining part instead positions sustainability indicators as a separate set of

measures, generating therefore a third category.
Sets of sustainability indicators have been proposed by many organizations. For
example, the GRI framework previously introduced identifies “core” and “addi-
tional” indicators a company should use for measuring and reporting its economic,
social and environmental performance to generic stakeholders. Indicators described
vary depending on the sector specification. Further, sustainability indicators are
recommended by standards bodies, as in the case of the International Standard for
Environmental Management System (ISO 14001) and the European
Eco-Management and Audit Scheme (EMAS). Furthermore, diverse set of metrics
related to full cost and triple bottom line issues have been developed by accounting
scholars (Bebbington et al. 2007).
Similarly to indicators, research has been developed in order to propose and
build new frameworks for sustainability measurement as described ahead.
Van der Woerd and Van den Brink (2004) propose an evolution of the popular
Balanced Scorecard, namely the “Responsive Business Scorecard” (RBS), which
enables companies to score at profit, people and planet and at the same time to
incorporate stakeholders’ demand into internal operations to improve firm perfor-
mance. RBS includes five perspectives that are: customer & suppliers, financiers &
owners, society & planet, internal process and employees learning. Epstein (2008)
offers a sustainability measurement framework that develops over four areas that
Sustainability Measurement and Reporting: Impacts on Finance, Stakeholders. . . 229

are inputs (external, internal and business context, human and financial resources),
processes (leadership, strategy, structure and systems), outputs (sustainability per-
formance and stakeholder reactions) and outcomes (long term corporate financial
performance). Further, the “Sustainability Evaluation and Reporting System”
(SERS) (Perrini and Tencati 2006) describes an integrated methodology aimed at
monitoring and tracking from a qualitative and quantitative viewpoint the overall
firm performance based on a relational view of the firm and the strategic value of
stakeholder relations. Bonacchi and Rinaldi (2007) propose a performance mea-
surement system based on two managerial instruments, namely “sustainability
DartBoards” and “sustainability Clovers” that establish a set of primary and
secondary measures, connected to stakeholder satisfaction, and are able to sense
and articulate both win–win and trade-off situations. The Full Cost Accounting
Sustainability Assessment Models (SAM) experimented by Bebbington et al.
(2007) in the UK and New Zealand based on economic, environmental, social
and resource impacts demonstrated the potential contribute of traditional account-
ing technologies. Ultimately, Taticchi et Al. (2009, 2010, 2012) provide general
guidelines for the development of integrated frameworks for performance measure-
ment as well as Cagnazzo et Al. (2009) for the supply chain context, and Tonelli et
Al. (2009) for the assessment of organization both product-service oriented.

3 Conclusions

This chapter has investigated the topic of sustainability with reference to its impacts
on traditional measurement and reporting practices. Particularly, the issue was
investigated in relation to three main areas: finance and investments, stakeholders
communication and engagement and, internal measurement and management.
With reference to finance and investments, the impact of the sustainability topic
is clear. In fact, there is evidence of a growing number of investments that are
driven by the assessment of sustainability performance of firms. As a consequence
of this, new financial frameworks are emerging for assessing sustainability perfor-
mance of organizations (such as the DJSI) and new suppliers are providing
sustainability data (such as Bloomberg). The recent financial crisis has pushed the
need of transparency, and it is opinion of the Author that the area of sustainable
investing will grow dramatically in the next years, calling consequently for the
development of new tools and frameworks.
The sustainability role in stakeholders communication and engagement M&R
practices was further discussed. In this area, both research and evidence from
industries seems to have achieved a considerable level of maturity. Framework
such as the Global Reporting Initiative reflects this maturity, and current level of
diffusion as well as trends in adoption let assume that GRI could become the main
standardized form of sustainability reporting for large corporations worldwide.
Such a methodology has proofed to be successful for managing communication
forward a diverse set of stakeholders (this is facilitated by the stakeholder
230 P. Taticchi

engagement process that sets the foundation of the methodology), but appears to
have limits for the management of internal performance of organizations.
Last, the chapter discussed the emerging body of sustainability research in the
area of internal measurement and management systems. In this regard, even if a
number of methodologies have been proposed in literature, the research field
appears to be immature and frameworks have not yet emerged for this purpose.
Therefore there is hope that models similar to the traditional balanced scorecard
will emerge, in order to support internally sustainability measurement and manage-
ment processes.

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Sustainable Use of IT

Zahid Hussain and Mohammed Addris Bostan

1 Sustainability Definition and Application IT Industry

The word sustainability is derived from Latin, sustinere (tenere: hold, keep; com-
prehend; represent; support; and sus: up) (Myetymology). The most widely quoted
definition of sustainability and sustainable development is that of the Brundtland
report to the United Nations on March 20, 1987:
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. (UNWCED 1987)

The report highlighted three fundamental components to sustainable develop-

ment: environmental protection, economic growth and social equity and was
primarily concerned with securing a global equity, redistributing resources towards
poorer nations whilst encouraging their economic growth. The report also
suggested that equity, growth and environmental maintenance are simultaneously
possible and that each country is capable of achieving its full economic potential
whilst at the same time enhancing its resource base. The report also recognised that
achieving this equity and sustainable growth would require social and technological
change.
The term “Green” is often viewed from a purely environmental standpoint, even
though there may be other benefits to “going green” beyond saving the planet.
Conversely “sustainability” is a much broader term that denotes preparing the
business for resource savings and optimisation (GCIO).
The environmental impact of conducting business, especially in the area of IT,
continues to receive increased attention on all fronts; from customers and

Z. Hussain (*)
School of Management, University of Bradford, Emm Lane, BD9 4JL Bradford, UK
e-mail: [email protected]
M.A. Bostan
School of Management, c/o: Z Hussain, University of Bradford, Emm Lane, BD9 4JL
Bradford, UK

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 233
DOI 10.1007/978-3-642-37018-2_11, © Springer-Verlag Berlin Heidelberg 2013
234 Z. Hussain and M.A. Bostan

employees to regulatory agencies and local communities. In recent times, environ-

mental considerations have become explicit criteria for making decisions, right
alongside financial considerations. Applying an environmental lens to strategic
decision making is becoming more commonplace, focusing on the win-win benefits
associated with balancing what might once have been seen as competing interests.
“Sustainable IT”, “Green IT” and “green computing” are interchangeable terms
used to describe environmentally responsible use of computers and related
resources. Such practices include the implementation of energy-efficient central
processing units (CPUs), servers and peripherals as well as reduced resource
consumption and appropriate disposal of electronic waste (e-waste) (Brighthub).
Computer systems are a central part of the modern workplace, homes and
communities. Technology continues to advance rapidly and the IT community
needs to make sure this progression is focused on serving individuals, society and
businesses in an efficient and sustainable manner.

2 Green IT Concepts

The affects of IT on the environment are many; each stage of a computer’s life has
some degree of impact. From production to throughout its use and into its disposal,
present environmental problems. Manufacturing computers and their various elec-
tronic and non-electronic components consumes electricity, raw materials,
chemicals, and water, and generate hazardous waste. All these directly or indirectly
increase carbon dioxide emissions and impact the environment. The total electrical
energy consumption by servers, computers, monitors, data communications equip-
ment, and cooling systems for data centres is steadily increasing, resulting in
increased greenhouse gas emissions.

2.1 Green Hardware Initiatives

The complexities of greening hardware devices cannot be considered in isolation

and a more holistic approach is required. This approach must take into account the
manufacturing and logistics operations as well as the utilisation of the end product.
The main advances have focused on increasing energy efficiency whilst at the same
time providing faster processing power; however computer manufacturing is also
recognised as a significant cause for environmental concern (IBM). Manufacturers
and designers are increasingly adopting manufacturing processes that consume
fewer resources and produce less waste by focusing on the areas below:
• Reducing the resources consumed and the waste generated when producing
computers or components,
• Developing cleaner manufacturing processes,
Sustainable Use of IT 235

Fig. 1 Green IT lifecycle

• Minimising the energy and other resources that computers consume, and
• Enabling computers and components to be used (and thereby stay out of the
waste stream) longer.
(Goldberg 1998)
The four areas above provide a strong framework to achieving environmental
sustainability from the design, manufacturing, use and disposal of IT; making IT
greener throughout its entire lifecycle (Fig. 1).
(Murugesan 2007)
Computer hardware is developing at a fast pace with every new version of
chipset, desktop, server, storage system and wireless router not only becoming
smaller, but also evolving to better support business and user requirements as they
move to the latest mobile, Virtualization and green technologies.
As mentioned green hardware technologies are offering faster processing power
whilst at the same time providing energy efficiency. Computer chipset speed is one
of the most important factors when choosing hardware and the latest innovations
are all about multi-core. Although the chips themselves aren’t getting any bigger,
their capabilities are scaling quickly as they evolve from the dual-core models to the
quad-cores and six-cores of today (Intel).
Multi-core processor architecture entails placing two or more execution cores,
within a single processor. The operating system perceives each of its execution
cores as a discrete logical processor with all the associated execution resources. By
apportioning up computational work among multiple execution cores, a multi-core
processor can perform more work within a given clock cycle. This enables
enhanced performance, reduced power consumption, and more efficient simulta-
neous processing of multiple tasks (Searchdatacentre).
As the complexity and operational expenses of IT infrastructure continues
to increase, blade servers as a solution are becoming increasingly common.
236 Z. Hussain and M.A. Bostan

The integrated nature of the blade platform enables organisations to solve energy
and space challenges as well as improve the flexibility of their infrastructure. As the
requirements for space decrease, so do those for power and cooling and because
they’re smaller, they tend to consume less power than traditional servers (Blade).
Server Virtualization has made the computer industry paradigm shift from
“1 application ¼ 1 server” to running many environments on a single machine.
Virtualization is software technology which uses a physical resource and divides it
up into virtual resources called virtual machines (VM’s). Virtualization allows
users to consolidate physical resources, simplify deployment and administration,
and reduce power and cooling requirements. While virtualization technology is
most popular in the server world, it is also being used in data storage such as
Storage Area Networks, and inside of operating systems (Techrepublic) (Source:
Brighthub1)
The transition from being very ‘personal hardware dependent’ to a world where
resources are shared is slowly and unobtrusively becoming apparent. Many
organisations have already transitioned to using a cloud environment for many of
their business operations. The cloud utilises the resources from the computers as a
collective virtual computer, where the applications can run independently from
particular computer or server, making the hardware less important to how the
applications work. The applications can take advantage of all that computing
power as if they were running on one particular machine. Cloud computing also
allows for flexibility, depending on the demand, the cloud resources can be
allocated accordingly without the need for assigning specific hardware for the job
all reducing the environmental impact (CIO).
Whilst there is much activity in greening servers with various initiatives as
discussed, the desktop environment has also received a plethora of new initiatives
and products all designed to reduce the environmental impact. However, the
desktop environment’s users are also being influenced by the choices they make;
and perhaps the biggest choice that is made every day is whether to power down the
PC at the end of the day.
By leaving computers on all night for a year, a UK company with 10,000 PCs wastes:
1.4 million kWh
£168,000
828 t CO2 emissions (1E)

Many organisations are investing in desktop power management technologies to

effectively improve the environmental footprint of their IT leading to immediate
and sustained reduction in energy and to a large extent shape users’ behaviour.
Desktop computing virtualisation is emerging as a viable alternative to the
traditional desktop PC, both from an environmental perspective and financially.
Desktop virtualization separates a personal computer desktop environment from the
physical machine. The resulting “virtualized” desktop is stored on a remote central
server, instead of on the local storage of a remote client; thus, when users work from
their remote desktop client, all of the programs, applications, processes, and data
Sustainable Use of IT 237

used are kept and run centrally. The idea behind desktop virtualization is the ability
to apportion resources to users as and when they require it thereby reducing both
cost and the environmental impact (Citrix).
In addition to desktop virtualisation, the use of thin client technology is also
increasing (Internetevolution). Thin clients are essentially a bare-bones client
machine, used to query the server, which in turn does the bulk of the work. The
absence of dynamic or moving parts to serve one’s computing purpose entails less
generation of heat. This is mainly because thin clients make use of solid state
devices like flash drives instead of hard drives.
Although there is a difference between virtual desktops and thin clients, the
current trend is to use them in conjunction with each other. Instead of complete user
desktops, thin clients are used to radically reduce costs and environmental impact,
leading to:
• Less heat generated means less carbon impact.
• Less electronic wastes since there are fewer parts to replace.
• Less complexity involved in thin client manufacture which cuts down costs from
the point of production at the supplier’s chain.
• Thin client transport from manufacturer to distributors and to retailers occupies
less volume due to its compact dimension of only a fifth of a regular PC, which
equates to lesser transport requirement (Wyse).
The concepts of virtual desktops and thin clients may have started out as
independent solutions; however their combined use makes them a compelling and
viable alternative to organisations looking to cut down significantly on their cost
and environmental footprint.
Finally, it is important to acknowledge the switch from CRT (Cathode Ray
Tube) to LCD (Liquid Crystal Display) not only for easier transportation but also as
an energy efficient device. Whilst LCD monitors have been embraced for a number
of years, very few purchasing decisions have included environmental impact and
instead the focus has been on elements such as contrast, brightness, aspect ratio and
ergonomic options (CNET).

2.2 Green Software Initiatives

Green software, it would seem is very much in its infancy, relying on hardware to
help organisations achieve their carbon reduction goals (Computer Weekly). Soft-
ware actually plays a big role too, from the drivers to the operating system and even
extends to application software. Energy efficiency should be considered as a
component of the software design strategy. The efficiency of the software can
have a profound impact on the way in which the software interacts with the
hardware and the resultant energy consumption.
The green software dichotomy is apparent through the application of software to
support green initiatives, such as server virtualisation and SaaS (Software as a
238 Z. Hussain and M.A. Bostan

Service), utilising cloud architecture. Furthermore, software designed to help

businesses address the growing need to maximise energy efficiency and reduce
costs associated with power and cooling are on the increase with major vendors
offering energy management software.
A number of large IT suppliers have also created carbon or environmental
management systems that go well beyond existing corporate environment software
or carbon footprint calculators, in that they are marketed as decision-making, rather
than inventory-building, tools. Such detailed analysis allows organisations to manage
and cut emissions, and thus help them make more cost and environmentally effective
decisions. These systems assist organisations to work out the carbon cost of the
transaction as well as the business cost and ultimately help then decide where to
spend their money to ensure the maximum return on the triple bottom line (IBM1).
Collaboration technologies, whilst not directly impacting the green IT agenda do
provide organisations with the facility to reduce their carbon footprint by reducing
the need for employees to travel to meetings. Collaboration applications through a
powerful combination of technology and design integrates advanced audio, ultra-
high-definition video, and interactive collaboration tools with the underlying net-
work as the platform to deliver an immersive remote meeting experience (Cisco).

2.3 Green Data Centre Concepts

The evolution of distributed computing has led to an explosion in data centre

complexity as the number of servers, storage devices, and local and wide area
networks has grown exponentially. At the same time, processors continue to
become more powerful but applications remain rigidly tied to specific servers,
leading to low server utilisation across the data centre. Measuring and improving
energy efficiency within data centres is becoming increasingly important for
organisations to consider.
One of the largest issues within data centres is underutilised servers with
performance levels of between 7 % and 15 %, an architectural artefact of the
“one server, one application” general guideline. This low utilisation and the desire
to increase productive performance for servers has been an integral factor behind
server virtualisation projects (Gartner).
Temperature is a critical factor in the modern data centre, and it is only
becoming more so. Increased processor speeds, smaller server form factors, and
higher server rack densities have all contributed to tremendous challenges for data
centre administrators in the areas of cooling and air movement. Many data centres
in use today were built very conservatively in the 1980s and 1990s around unreli-
able equipment. Most mainframes and servers wouldn’t even run if the inlet
temperature is warmer than 28  C thus cooling the entire data centre, even though
most of the equipment didn’t require cooling at all (Openxtra).
Power density in the data centre is increasing due to blades, more condensed and
faster processors and a proliferation of stacked servers. These advances in
Sustainable Use of IT 239

technology make cooling placement critical. Instead of cooling the entire data
centre due to the least common denominator, adaptive cooling isolates these
high-density areas to be cooled when needed. The idea is to cool specific hot
spots with regularity instead of the entire room at the same level. As power density
increases and servers become much more advanced, it makes sense to raise temper-
ature conditions in the data centre, although many companies question whether
today’s servers are still susceptible. HP and Dell warranty their servers to 35  C and
rackable servers at 40  C (Searchdatacentre1).
Airflow is often ad hoc in the data centre with hot air from one server drifting
into the inlet of another although most data centres have rectified this with hot and
cold aisles to keep the air isolated. Newer “green” data centres have energy-saving,
low-carbon emitting “free cooling” technology. Free-cooling systems make use of
low outside air temperatures for chilling water used in air conditioning, rather than
traditional energy intensive refrigeration systems, immediately reducing energy
requirements. A fully developed air management strategy can produce significant
and measurable economic benefits and should be the starting point when
implementing a data centre energy savings program (EWeek).

2.4 Green Storage Concepts

As hard drive prices have fallen, storage farms have tended to increase in capacity
to make more data available online. This includes archival and backup data that
would formerly have been saved on tape or other offline storage (CIO1).
In the drive to make IT infrastructure greener, data storage technology is
becoming a key piece of the puzzle. Historically, enterprise users have relied on
relatively large 3.5 in. hard disk drives, which are kept constantly spinning at very
high speeds to increase performance but required inordinate amounts of power and
rack space, representing a significant overhead in the data centre. The management
of storage resources has also contributed to increased overheads as organisations
have traditionally allocated physical chunks of storage to particular departments,
servers or applications leading to over provisioning of hard drive space, wasting
energy as the disks spin with allocated but unused space.
More efficient network-attached storage (NAS) systems are becoming prevalent
in data centres. Although tape still has a place for long-term storage needs, online
disk-based storage eases implementation of lifecycle management while enabling
new efficient storage models such as continuous data protection (CDP). Such
capabilities help better support mobilisation because users are not tied to one
place for their storage (Computer Weekly).
A variety of techniques have emerged to help reduce the power and space
overhead in storage infrastructures. Slimming down disks to 2.5 in. makes them
easier to spin and reduces power usage by approximately 45–50 % (Storage News).
Other green storage tactics include thin provisioning, tiered storage and data
240 Z. Hussain and M.A. Bostan

de-duplication, while virtualization technology makes hard drive provisioning more

efficient, allocating storage capacity exactly where it is needed without wasting it.
Solid State Drive (SSD) technology once thought to be too expensive for the
traditional business enterprise is gradually becoming mainstream as enterprises
search for faster storage processing systems for their most vital applications. SSD
flash technology can cost as much as 30 times more than Fibre Channel drives on a
per-gigabyte basis, but the cost has been decreasing 50–70 % per gigabyte each
year. Organisations are recognising the benefits in terms of much greater reliability,
durability and performance, as well as the need for less power. SSDs have no
moving parts and generate virtually no heat, making them much more attractive in
the data centre due to their faster response times and low energy consumption
(enterprisestoageforum).

2.5 Green Metrics

Implementing standards and metrics can help ensure that a data centre is run
smoothly. By clearly defining metrics an organisation can increase its productivity.
As the data centre is the hub for the entire business, making sure that a data centre
has clearly defined metrics must be a requirement for a green IT strategy.
The Green Grid has published two metrics to cover data centre efficiency, Power
Usage Effectiveness (PUE) and Data centre Infrastructure Efficiency (DCiE). PUE
is defined as the total facility power divided by the IT equipment power. The
reciprocal of the PUE, the DCiE, is defined as: IT equipment power/total facility
power  100 %.
The DCiE metric is the ratio of power delivered to the IT loads to the total power
into the data centre. In buildings that combine data centres and office space, it’s
important to measure the specific power consumption.
The IT equipment power is defined as the power consumed by the equipment
that is used to manage, process, store or route data in the data centre. The core
components include the electrical load associated with all the IT equipment, such as
compute, storage and network equipment, along with supplemental equipment,
such as keyboard, video & mouse (KVM) switches, monitors and workstations/
laptops used to monitor and run the data centre.
Total facility power involves everything that supports the IT equipment load,
including:
• Power delivery components, such as an uninterruptible power supply (UPS);
switch gear; generators; power distribution units (PDUs), which are part of the
UPS; and distribution losses external to the IT equipment
• Cooling system components such as chillers, computer room air conditioning
units (CRACs), direct expansion air handler (DX) units, pumps and cooling
towers
• Other miscellaneous component loads, such as data centre lighting
Sustainable Use of IT 241

PUE: Power Usage Effectiveness

DCE: Data Center Efficiency

Building Load
Demand from grid

Total Power IT IT Load

Facility Switchgear Equipment Servers
Power UPS Power Storage
Battery Telco
backup equipment
Etc. Etc.
Cooling
Chillers
CRACs
Etc.

Total Facility Power

PUE =
IT Equipment Power

DCE = 1 = IT Equipment Power (Multiply both terms by 100%)

PUE Total Facility Power

Fig. 2 PUE and DCiE calculation (Source: Green Grid 2008)

Although these metrics are ostensibly the same, using them together shows the
efficiency of data centre from two perspectives (Fig. 2): the data centre energy used
to power the IT equipment and the effect on the total power needed.
The biggest issue with the PUE and DCiE metrics is that they do not fully
account for variations in IT load. The simplicity of the metrics means that they
provide a single snapshot of the energy efficiency of the data centre at a given
moment in time. This snapshot can and will vary with time, IT load and the
efficiencies of the components, such as CRAC units that consume large amounts
of energy. Despite these limitations, the simplicity of the calculations
Despite the limitations, these metrics have been well-received in the industry.
The same issue that causes the problems described above namely, the simplicity of
the metrics is also the main reason for the endorsement, the European Union’s Code
of Conduct on running data centres (Datacenterdynamics).
In addition to data centre metrics, computer products are also subject to energy
efficiency standards. Energy Star is an international standard for energy efficient
consumer products. It was first created as a United States government program by
the Clinton Administration in 1992, but Australia, Canada, Japan, New Zealand,
Taiwan and the European Union have also adopted the program. New Energy Star
4.0 specifications for computers became effective on July 20, 2007 and Energy Star
5.0 became effective on July 1, 2009 requiring the use of electrical energy efficient
computer power supply units (Energy Star).
242 Z. Hussain and M.A. Bostan

Whilst not directly measuring energy efficiency, products certified by the Elec-
tronic Product Environmental Assessment Tool (EPEAT) are judged on 23 required
attributes that make up an environmental performance rating and also include a
further 28 optional attributes.
In summary, the EPEAT criteria include:
• Restrictions on hazardous substances in compliance with the European RoHS
Directive for cadmium, mercury, lead, hexavalent chromium, and certain
brominated flame retardants
• Batteries must not contain lead, cadmium, and mercury
• Use of polyvinyl chloride (PVC) and chlorinated plastics is also limited
• Recycled plastic content criteria
• Ability to be disassembled for recyclablility
• Warranty criteria
• Upgradability
• Energy conservation criteria
• End of life criteria, such as a product take-back program or battery recycling
• Corporate guidelines, including an environmental policy consistent with ISO
14001, an environmental management system, and corporate reporting
• Reduction/elimination of toxics in packaging
• Recycled packaging content, and packaging that can be reused or recycled
(EPEAT1)
EPEAT certifies products at three different levels:
• Bronze – product meets all 23 required criteria
• Silver – product meets all 23 required criteria plus at least 50 % of the optional
criteria
• Gold – product meets all 23 required criteria plus at least 75 % of the optional
criteria
According to the Green Electronics Council’s EPEAT 2007 Environmental
Benefits report (EPEAT2), the following savings were realised in 2007:
• 42.2 billion kwh of electricity were saved
• 174 million metric tons (including 3.31 million metric tons of greenhouse gas)
were eliminated
• 365,000 metric tons of water pollutant emissions were eliminated
While Energy Star rates energy efficiency, EPEAT covers other factors includ-
ing the amount of toxic material used in electronics, manufacturers’ recycling and
take-back policies, and packaging all positively impacting the environment and
reducing the carbon footprint.
The majority of legislation in existence is focused on restricting or reducing the
use of environmentally harmful or toxic chemicals and materials in the manufacture
and design of IT and other electrical equipment, as well as ensuring that materials
Sustainable Use of IT 243

used in the construction of IT equipment are either highly recyclable or environ-

mentally benign. This responsibility falls on both the vendor of the equipment and
on the user.

3 Green Organisational Performance

Organizational performance can be impacted by structure, objectives, people and

technology; and these in turn can be influenced by the organisation’s environment.
The message of Leavitt’s diamond is simply – every element of organizational
life affects every other: change the technology and you change the task and ought to
change the structure and the people. Change the people, and they will find new ways
of performing tasks and the technology must adjust, as must everything else.
The record of implementing information systems is mixed. While many projects
transform business operations and enhance organisation performance, others fall
short of expectations. Long term studies (Boddy and Gunson 1996; Currie 1997;
Drummond 1996) show that IT projects fail to meet expectations of those who
initiate them.
Nadler et al. (1995) developed a useful way of classifying types of organisational
change based on form: incremental, discontinuous and organizational response to
the need for change: anticipated, reactive.
The change management process as proposed by Lewin 2010 provides a poten-
tial overall framework for building more effective organisations.
Whilst Lewin’s models of organisational change are well established, the imple-
mentation of a Green IT strategy and the impact of the change on the employees
need to be carefully considered. Adams et al. (1976) suggest that an individual will
pass through all the experiences during change however, the rate of change will
depend on the impact to the individual’s working practices and how accepting or
threatening the change is perceived.
Results of unsuccessful changes, such as a decrease in morale or productivity,
may negatively affect an organization, and ultimately lead to organizational failure.
Okumus and Hemmington (1998) identified and investigated the barriers and the
sources of resistance to change and concluded that the more radical the change, the
more likely it is to be met with significant resistance. They identified communica-
tion, training, participation, involvement, and organisational culture as strategies to
overcome resistance to change. Whilst the study centred on changes within the
hotel industry, the areas identified to overcome resistance can be applied to any
organisation and industry sector. First-order change is incremental; involving
behavioural adjustments considered appropriate within an organisation’s
established set of implicit or explicit beliefs about how it does or should act. It is
based on the assumption that a schema in use can guide individuals to grasp and
implement new behaviours (Bartunek and Moch 1987).
Second-order change refers to changes in the cognitive frameworks underlying
the organization’s activities, changes in the deep structure or shared schemata that
244 Z. Hussain and M.A. Bostan

generate and give meaning to these activities (Gersick 1991; Egri and Frost 1991).
It is based on the assumption that a new schema is sometimes required if new
behaviours are to be understood and adopted.
A schema has three general dimensions, which can be theoretically identified as
causality, valence, and inferences. Causality in a change schema provides the
knowledge framework that explains why change occurred (Lau and Woodman
1995). Valence allows a person to evaluate the significance or meaning of a specific
event, person, process, or relationship (Markus and Zajonc 1988). Inferences enable
a person to predict the future by specifying the likelihood of the occurrence of
events or behaviour.
The major problem in unsuccessful change is a lack of communication. Studies
show that many companies fail to keep managers and employees informed about
how changes are to proceed in their organizations. Communicating the
organisation’s new mission and vision is seldom carried out in an effective and
satisfactory manner. Moreover, senior managers often do not provide training for
the middle-level managers who are responsible for implementing change (Koonce
1991). The more employees are involved, the less their resistance to change will
be. Changes do have an influence on attitudes toward organisational change and
commitment and should be carefully planned and implemented.

3.1 Operating Environment

There is plenty of evidence that the context in which organisations operate pro-
foundly shape their nature and development. Whilst the idea of organisations
adapting to the environment is not in itself problematic, it is a question of how it
is conceptualised. Mullins (1985): 12 claims that organisations are viewed in their
total environment.
Over the years, research has demonstrated that an organization operates best
when its structure and processes fit, or match, the corresponding mission environ-
ment. Contingency theorists argue that organizational effectiveness is influenced by
the “degree of fit” between the requirements of the environment and the
characteristics of the organization (Burton and Obel 1998).
Quinn 1988; Rohrbaugh (1983) noted that different conceptualisations of orga-
nizational effectiveness were associated with four common organizational
perspectives, which they categorized as:
• The human relations model
• The open systems model
• The rational goal model (closed systems perspective)
• The internal process model (closed system perspective)
Using multivariate analysis, they found three value dimensions that underlay
these different and seemingly conflicting conceptualizations of organizational
effectiveness:
Sustainable Use of IT 245

• Organization structure, which distinguishes between organizational flexibility/

adaptability and control/stability
• Organizational focus, which distinguishes between an internal and an external
orientation
• The means-ends continuum, which distinguishes between an emphasis on out-
come objectives or the means by which these objectives are to be achieved, such
as processes and/or important causal attributes.
Quinn and Rohbaugh (1983); Quinn (1988) noted that organizations were likely
to experience tension among organizational effectiveness attributes; all
organizations have a need for some level of stability as well as a need to be flexible
and adaptable; a need for control and discipline as well as a need to allow some
degree of freedom and autonomy; a need for rational formal structures and
non-rational informal relations. They concluded that effectiveness depended upon
the ability of an organization, and its managers, to strike the right balance among
these critical attributes, as required by the organization’s objectives and situation.

3.2 Culture

The values and norms of a culture do not emerge fully formed. They are the
evolutionary product of a number of factors, including the prevailing political,
economic, social and educational factors. Thus, the management challenge for
many organisations is to be able to adapt their organisations to culturally distinct
environments without losing organisational consistency.
Institutional theory holds that the beliefs, goals, and actions of individuals and
groups are strongly influenced by various environmental institutions (Scott 1995),
and that their role in doing this is subtle but pervasive. To achieve this balance
requires organisations to develop the cultural sensitivity and ability to manage and
leverage learning to build future capabilities (Bartlett and Goshal 1998).
Culture refers to the system of meaning, values, beliefs, expectations and goals
shared by members of a particular group of people and that distinguish them from
members of other groups. It is a product of ‘the collective programming of the mind
(Hofstede 1991) that is acquired through regular contact with other members of the
group.
It is useful to identify clear framework for analysing and understanding cultural
differences.
Hofstede identified four key dimensions and later included the fifth, LTO, which
impact on natural cultural differences:
• Power distance – At the core of this dimension lies the question of involvement
in decision making. In low power-distance cultures, employees seek involve-
ment and have a desire for a participative management style. At the other end of
this scale, employees tend to work and behave in a particular way because they
accept that they will be directed to do so by the hierarchy or the organisation.
246 Z. Hussain and M.A. Bostan

• Individualism – Collectivism – This dimension reflects the extent to which

individual’s value self-determination as opposed to their behaviour being deter-
mined by the collective will of a group or organisation.
• Masculinity – This is possibly the most difficult dimension to use in an
organisation context. In practice, the difficulty is more to do with terminology
and linguistics, in Hofstede’s work the dimension related to values. In highly
“masculine cultures” dominant values relate to assertiveness and material acqui-
sition. In highly “feminine cultures” values focus on relationship among people,
concern for others and quality of life.
• Uncertainty Avoidance – This dimension is concerned with employees’ toler-
ance of ambiguity or uncertainty in their working environment. In cultures
which have high uncertainty avoidance, employees will look for clearly defined,
formal rules and conventions governing their behaviour.
• Long term Orientation – Long-Term Orientation is the fifth dimension of
Hofstede which was added after the original four to try to distinguish the
difference in thinking between the East and West. With an understanding of
the influence of the teaching of Confucius on the East, long term vs. short term
orientation became the fifth cultural dimension.
Cultural considerations may be achieved by a framework, which addresses both
the style and working processes and provides a clear context for examining the
cultural and process elements of performance.
Although much can be achieved by working with specific teams, the truly
successful players are likely to be those which embed the change through integrated
changes to selection, development, reward and recognition policies and practices.
In doing this the value of effective cultural working can be captured at many levels
in the organization and teams, be they project based or permanent, will tend to reach
high performance levels more rapidly and consistently. This in turn can help
organizations build capability and competitive advantage.

3.3 Organisational Agility

Increasingly, organizations find themselves operating in environments

characterized by unprecedented, unrelenting, and largely unpredictable change.
So it’s not surprising to find that serious searches are underway for new and better
ways of strategizing, organizing, and operating and managing in dynamic and
turbulent circumstances. The proscriptions and prescriptions are many and varied,
and most have profound implications for the management of people (Dyer and
Shafer 1999).
Organizational agility is seen as both critical to business success and as growing
in importance over time. The benefits of enhanced agility include higher revenues,
more satisfied customers and employees, improved operational efficiency, and a
faster time to market. There are three distinct types of agility: strategic, portfolio,
Sustainable Use of IT 247

and operational. Strategic agility consists of spotting and seizing game-changing

opportunities. Portfolio agility is the capacity to shift resources – including cash,
talent, and managerial attention – quickly and effectively out of less promising
business areas and into more attractive ones. And operational agility involves
exploiting opportunities within a focused business model (McKinsey).
Recent research has conceptualised agility as an organisation level competency
to sense and respond to shifts in the business environments (Sambamurthy et al.
2003). Capabilities including IT infrastructure and entrepreneurial alertness are
important enablers of agility (Sambamurthy et al. 2003). An organisation’s IT
capabilities, core competencies and entrepreneurial orientation could differ under
different environmental conditions impacting organizational performance and agil-
ity (Melville et al. 2004; Piccoli and Ives 2005).

4 Legislation and Regulations

In July 2008, the UK government informed 10,000 businesses that they could be
affected by the Carbon Reduction Commitment (CRC), a climate change and
energy saving scheme that became effective as of April 2010 and is central to the
UK’s strategy for controlling carbon dioxide (CO2) emissions. The scheme will
address CO2 emissions not already covered by Climate Change Agreements and the
EU Emissions Trading System. Participating organisations will have to purchase
allowances equivalent to their emissions each year with 2010 being a “footprint”
year for organisations to capture their total carbon emissions. Allowances will be
sold to participants at a fixed price of £12 per ton of CO2 as of 2011 with auctioning
of carbon allowances starting in 2013 (DEFRA).
The proliferation of data centres required the constant addition of server, cooling
and ventilation equipment that led to an ever-increasing demand of energy and
increased presence of toxic and hazardous substances such as lead, mercury,
cadmium, and others. This made people look at ways to apply green technology
in computing to mitigate the serious environmental and health concerns.
The 1997 Kyoto Protocol for the United Nations Framework Convention on
Climate Change mandates reducing carbon emissions. The Kyoto Protocol made
computer manufacturers undertake energy audits to calculate the electricity used by
the device over its lifetime and determine the quantum of carbon dioxide emissions
to take remedial action.
Under the Kyoto Protocol, industrialised countries and those in transition to a
market economy (the so-called “Annex I countries”) have agreed to limit or reduce
their emissions of six greenhouse gases. Each gas has a global warming potential
(GWP) based on its radioactive capacity compared with CO2. The GWP for each
gas is determined by the Intergovernmental Panel on Climate Change (IPCC) and
reviewed from time to time. The six greenhouse gases addressed by the Kyoto
Protocol are:
248 Z. Hussain and M.A. Bostan

• Carbon dioxide (CO2)

• Methane (CH4)
• Nitrous oxide (N2O)
• Hydrofluorocarbons (HFCs)
• Perfluorocarbons (PFCs)
• Sulphur hexafluoride (SF6)
The Protocol sets quantified emission limitations and reduction obligations with
respect to a basket of six gases. Of these, carbon dioxide (CO2), which derives from
the burning of fossil fuels such as coal, oil and gas, is the most important. Methane
(CH4) and nitrous oxide (N2O) emissions are also substantial contributors to the
problem (UNFCC).
The European Union’s adoption of Restriction of Hazardous Substances (RoHS)
in February 2003 restricts the use of lead, mercury, cadmium, hexavalent chro-
mium, polybrominated biphenyls, and polybrominated diphenyl ether in the manu-
facture of electronic and electrical equipments. The implementation of the RoHS
was through the Waste Electrical and Electronic Equipment Directive (WEEE) of
2005. On 11 January 2008, a new set of RoHS Regulations (Statutory Instrument
2008 No.37) was laid before the UK Parliament to come into force on 1 February
2008. These Regulations were updated in 2009, when amending Regulations were
laid before Parliament on 11 March and came into force on 6 April 2009. This
directive set targets for collection, recycling, and recovery of electrical goods,
aimed at reducing toxic e-waste (RoHS).
These regulations forced manufacturers to use non-hazardous materials in the
production of chipsets, processors, and companion chips as well as reducing their
carbon footprint.

5 CSR and Ethical Operations

The relationship between business ethics and CSR is often discussed. The concepts
are sometimes interpreted differently (Murphy 2002). Business ethics tends to be
more internal in its orientations while CSR is more external, but the orientation is
not an absolute one. Ethics usually deals with the individual level, while CSR is
associated with the organizational level.
In business ethics we have to include corporations as an ethical constitute unit.
Business ethics is more than applied ethics (Ulrich 2002). There is no area free from
normative presuppositions and economics, is a strongly normative “ideal theory” of
rational actions in a traditional point of view.
An organisation’s target is to achieve economic profit. Different ways to achieve
profit depend on the organisation’s focus, and their stakeholders are important for a
long term profit orientation. As a starting point for proper classification of CSR is it
relevant to focus on one of the following aspects of the reality: economics, ethics,
politics and social integration (Garriga and Melé 2004). This hypothesis is inspired
Sustainable Use of IT 249

and rooted in aspects that can be observed in any social system: adapting to the
environment, goal attainment and social integration. Different researchers
(Adolphson 2004; Bansal 2005; Carroll 1991; Jones 1995; Vogel 2005; Windsor
2006) have separated CSR based on motive where economic and ethics represents
each side and is mutually exclusive. These perspectives mean that CSR either has
an economic focus with a profit motive or an ethical focus with an obligation for
social betterment motive. This “either-or” perspective polarizes the discussion and
distracts attention from the space where economics and ethics converge and where
potential solutions exists (Bansal 2005).
Economic focus understands CSR as a measure of profits. It is recognised that
the corporation is an instrument for wealth establishment and that this constitutes its
ground social responsibility with only the economic aspect of the interactions
between business and society measured. Any expected social activity is accepted
if it is consistent with wealth creation (Garriga and Melé 2004). Ethical focus
argues that the relationship between business and society is embedded with ethical
values. From an ethical perspective and as a consequence, companies should accept
social responsibility as an ethical obligation more than any other consideration
(Garriga and Melé 2004). Ethical CSR implies that companies focuses upon ethical
perspective. Approaches are focused on the ethical requirements that strengthen the
relationship between business and society (Garriga and Melé 2004). In general
these approaches are based on values that state the right thing to do or the obligation
to create a good society and that organisations are obligated to make a payment in
kind for using society’s infrastructure, land, air, water, plants, and animals to
generate profit. They have a duty to reimburse society for the negative externalities
their activity generates.
Ethical CSR uses a basic share principal of moral reflection on tolerating
expensive public policy and practicing broad self restraint and altruism. Altruism
is voluntary contribution to society and stakeholders based on other regarding
attitudes. Altruism may involve uncompensated or costly contribution to
stakeholders or general welfare.

6 Future Trends and Direction

A mixture of trends and issues, including energy demand and cost, legislation,
growing environmental awareness and corporate social responsibility, are coming
together to drive the adoption of green IT. Not only can green IT help to minimize
the environmental impact of business, it can help to save energy, and therefore have
a direct and significant benefit for any organization’s bottom line.
While the green IT movement is currently being driven by the ‘early adopters’ –
those organizations with a forward-looking and responsible attitude towards the
environment – the movement is still in its infancy. However, in coming years it is
very likely that growing legislation, regulation and even taxes and levies will make
it a legal obligation for organizations to reduce their carbon footprint.
250 Z. Hussain and M.A. Bostan

More importantly, however, growing social, governmental and consumer pres-

sure could mean that organizations not taking their environmental responsibilities
seriously will suffer financially – from both the perspective of continuing to
needlessly waste energy and in terms of consumer choice. Already, a growing
number of organizations are differentiating themselves on their adoption of ethical
business strategies, and this trend is only likely to increase, as energy costs soar,
environmental damage continues and energy security becomes a major global issue.
As one of the largest energy consumers in any enterprise, the IT department has
to start considering the total lifetime impact of procuring and operating IT equip-
ment on the environment, and on the bottom line. Green IT offers significant cost
savings through energy efficient hardware and best practices, and for the reasons
outlined above, is set to become one of the most important issues over the next
decade.

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The Green Building Revolution: Advancing
Sustainability at Exponential Speed

Jeffrey S. Seigel

1 Introduction

Rule 1. When understanding “Green Building”, think in terms of Sustainability,

Triple Bottom Line and its impact on Society.
Rule 2. Buildings emit more CO2 than any other industry. In the US, the Building
Sector emits 39 % of CO2, more CO2 than the Transportation or Industry Sectors.
Rule 3. Buildings are responsible for 39 % of CO2 Emissions, 71 % Electricity
Consumption, 40 % of Energy Use, 12 % of Water Use and 65 % of Waste Output.
Rule 4. Green Building Processes have a huge impact on CO2 Reduction and
Energy, Water, and Waste Reductions. Green Buildings reduce CO2 Emissions by
33–39 %, reduce Energy Use by 40 %, reduce Water Use by 40 % and reduce Waste
Output by 70 %.
Rule 5. Green Buildings make excellent economic sense. Building values
increase, rent values increase, (ROI) return on investments increase, occupancy
rates increase and operating costs decrease.

This chapter is a compilation of research that the author believes will enhance your
understanding of Green Building and Sustainability. The author has listed ten rules for the
reader to follow; each rule will be discussed in detail throughout this chapter. The author hopes
that the reader grasps the gravity of how the Green Building Revolution will impact and benefit
our society and our planet. Green Building is a component of Sustainability and the Triple
Bottom Line, dealing with the environment, social justice, education, conservation, carbon
reduction, etc. The context of “Green Building” is much broader than constructing or
renovating a building.
J.S. Seigel (*)
New York University, New York, USA

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 253
DOI 10.1007/978-3-642-37018-2_12, © Springer-Verlag Berlin Heidelberg 2013
254 J.S. Seigel

Rule 6. Building are the primary (#1) CO2 emitter, they produce 39 % of CO2
Emissions, 71 % Electricity Consumption and 40 % of Energy Use. Any Green
Building Methodology that reduces these statistics has a positive impact on society.
The author is well versed in LEED (Leadership in Energy & Environmental
Design); LEED will be the basis for discussing Green Building Processes.
Rule 7. There are different types of LEED Rating Systems: New Construction
(NC), Existing Buildings: Operations & Maintenance (EB:O&M), Commercial
Interiors (CI), Core & Shell (CS), Schools, Retail, Healthcare, Homes, Neighbor-
hood Development.
Rule 8. The LEED System is based on 100 points and has four levels: Certified:
40–49 points, Silver: 50–59 points, Gold: 60–79 points and Platinum: 80 points and
above.
Rule 9. Green Building Process: Select your Rating System (New Construction,
Healthcare, Schools, etc.). Develop a LEED Strategy/Plan addressing five Green
Building Categories: Sustainable Sites, Water Efficiency, Energy and Atmosphere,
Materials and Resources and Indoor Environmental Quality. Evaluate which
categories to pursue (based on preference, complexity, cost, etc.), add up your selected
points and decide which LEED Level to pursue (Certified, Silver, Gold or Platinum).
Rule 10. Corporation are embracing “Green” Technologies/Corporate Sustainability.
Sustainability and The Triple Bottom Line are integrally related to Green Building; it
is imperative to understand how these three concepts correlate. Green Building is a
component of Sustainability and the Triple Bottom Line, dealing with the environ-
ment, social justice, education, conservation, carbon reduction, etc. The context of
“Green Building” is much broader than constructing or renovating a building.

2 What Is Sustainability?

There is no singular definition of Sustainability and the word is starting to become a

commonly used term with a diverse scope from environmental to social issues. The
author believes that sustainability or sustain means to maintain or continue, sur-
vival, maintenance, continuity, not losing ground or going backwards. The author
typed in “Definition of Sustainability” in Google and received almost two million
hits. The Environmental Protection Agency/EPA (2012) provided the following
definition of sustainability:
Sustainability is based on a simple principle: Everything that we need for our survival and
well-being depends, either directly or indirectly, on our natural environment. Sustainability
creates and maintains the conditions under which humans and nature can exist in productive
harmony, that permit fulfilling the social, economic and other requirements of present and
future generations. Sustainability is important to making sure that we have and will
continue to have, the water, materials, and resources to protect human health and our
environment.
The Green Building Revolution: Advancing Sustainability at Exponential Speed 255

The author endorses the definition of the Brundtland Commission, United

Nations (1987), when understanding “Sustainable Development”.
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.

2.1 What Is the Triple Bottom Line?

Civilization inherits the earth from their parents, and then nurtures the earth for
their children. What is the “Triple Bottom Line (TBL or 3BL)”? The “Triple
Bottom Line” is the three pillars of Sustainability: People, Planet & Profit. In the
Corporate Environment or Corporate Social Responsibility (CSR), these three
pillars deal with Social Justice (People), Environment (Planet) and Economics
(Profit).
Rule 1. When understanding “Green Building” think in terms of Sustainability,
Triple Bottom Line and its impact on Society.
When researching the “Triple Bottom Line”, The Earth Charter (2012) discusses
“a sustainable global society founded on respect for nature, human rights, economic
justice, and peace.” Now how does “Green Building” work into this context of
Sustainability, Triple Bottom Line (People, Planet & Profit), and enhancing
society?

3 What Is Green Building?

The author typed “Green Building” in Google (2012) and received over one billion
hits.
The Environmental Protection Agency (2012) gave the following definition for “Green
Building”;
Green Building is the practice of creating structures and using processes that are
environmentally responsible and resource-efficient throughout a building’s life-cycle
from siting to design, construction, operation, maintenance, renovation and deconstruction.
This practice expands and complements the classical building design concerns of economy,
utility, durability, and comfort. Green Building is also known as a sustainable or high
performance building. Green Buildings are designed to reduce the overall impact of the
built environment on human health and the natural environment by: efficiently using
energy, water, and other resources, protecting occupant health and improving employee
productivity and reducing waste, pollution and environmental degradation.
The United States Department of Housing (2012) defines Green Building:
Green Building, an approach to sustainable development that is designed to result in a
property that reduces its impact on the environment, costs less to operate, and improves the
residents’ quality of life. Green Building considerations start with site selection and include
building placement and design, materials and techniques used in construction, and all the
systems, appliances, and fixtures within the building.
256 J.S. Seigel

3.1 What Is Green Building’s Impact on Society? Green

Building Facts and Statistics

What is Green Building’s impact on society? The following statistics used in this
chapter can be found in the US Green Building Council (2012) website. The
USGBC has created an extensive Green Building methodology called LEED
(Leadership in Energy & Environmental Design) and this chapter will be discussing
this methodology/scorecard in detail. The author suggests that you peruse www.
usgbc.org.
Green Buildings/LEED-Certified buildings are designed to:
1. Lower operating costs and increase asset value
2. Reduce waste sent to landfills
3. Conserve energy and water
4. Be healthier and safer for occupants
5. Reduce harmful greenhouse gas emissions
Buildings are the primary (#1) CO2 Emitters, Transportation is #2 and Industry
is # 3. When you think of how much CO2 is emitted by cars or coal plants,
remember that Buildings are # 1. Think of how many buildings there are across
the globe; no doubt they emit a lot of CO2. Green Building Practices can help
reduce these CO2 emissions immediately.
Rules 2. Buildings emit more CO2 than any other industry. Buildings #1.

3.2 What Are the Impacts of US Buildings on Resources?

US Green Building Statistics

• Buildings – 39 % of CO2 Emissions
• Buildings – 71 % Electricity Consumption
• Buildings – 40 % of Energy Use
• Buildings – 12 % of Water Use
• Buildings – 65 % of Waste Output
Rule 3. Buildings use a tremendous amount of water, energy and electricity
resources and are responsible for a huge amount of CO2 emissions and waste
output. We learned in Rule 2, Buildings emit more CO2 than any other industry.
Buildings are responsible for 39 % of CO2 Emissions, 71 % Electricity Consump-
tion, 40 % of Energy Use, 12 % of Water Use and 65 % of Waste Output (Fig. 1).
The Green Building Revolution: Advancing Sustainability at Exponential Speed 257

Fig. 1 US Building Impacts

(www.usgbc.org)

3.3 What Are the Reduction Impacts of Green Building

Techniques on US Buildings? US Green Building
Statistics

• Green Buildings – Reduce CO2 Emissions by 33–39 %

• Green Buildings – Reduce Energy Use by 24–50 %
• Green Buildings – Reduce Water Use by 40 %
• Green Buildings – Reduce Waste Output by 70 % (Fig. 2)
Rule 4. Green Buildings can have a huge impact on CO2 Reduction and Energy,
Water, and Waste Reductions. Green Buildings reduce CO2 Emissions by 33–39 %,
reduce Water Use by 40 %, reduce Waste Output by 70 % and reduce Energy Use
by 24–50 %. These statistics illustrate the importance of how Green Building can
reduce energy, water and waste consumption.

3.4 What Are the Economic/Business Benefits of Green

Building?

US Green Building Statistics:

• Operating Costs – Reduce 8–9 %
• Building Value – Increases 7.5 %
• Return on Investment – Increases 6.6 %
• Occupancy Ratio – Increases 3.5 %
• Rent Ratio – Increases 3 %
Rule 5. Green Building makes excellent economic sense. Building values
increase, rent values increase, (ROI) return on investments increase, occupancy
rates increase and operating costs decrease. Looks like a veritable “Win-Win”
scenario.
258 J.S. Seigel

ENERGY CO2 WATER SOLID

USE EMISSIONS USE WASTE

24%*-50%**

33%***-39%**
40%**

70%**

Green Buildings Can Reduce...

* Turner, C. & frankel, M. (2008). Energy performance of LEED for New Construction buildings: Final report.
** Kats, G. (2003). The Costs and Financial Benefits of Green Building: A Report to California’s Sustainable Building Task Force.
*** GSA Public Buildings Service (2008). Assessing green building performance: A post occupancy evaluation of 12 GSA buildings.

Fig. 2 Reduction Impacts of Green Building (www.usgbc.org)

4 Green Building Scorecard, Reporting and Processes

Thus far, this chapter has established the definition of “Green Building” and how it
fits into the global context of Sustainability and the Triple Bottom Line. It has also
discussed the Impacts of Buildings on Water, Energy and Waste Resources, Reduc-
tion Impacts of Green Building Techniques on US Buildings, and the Economic
Benefits of Green Buildings. In this section, we are going to discuss global Green
Building Reporting Methodologies; Green Building Scorecards that outline Green
Building Processes. Different countries use different methodologies for reporting
Green Building. In the United States, we use a Green Building Scorecard called
LEED (Leadership in Energy and Environmental Design, www.usgbc.org). In the
UK, Netherlands Spain they use a Green Building Scorecard called BREEAM
(Building Research Establishment Environmental Assessment Method, www.
breeam.org). In Canada, they use Green Globes (www.greenglobes.com); in
Australia and New Zealand they use Green Star (www.gbca.org.au). We have
included an extensive list of countries and their Green Building Reporting Systems.
The author is well-versed in LEED, thus LEED will be the methodology used to
discuss Green Building Processes in this chapter. Each Green Building Reporting
System has its unique benefits and characteristics. We already discussed that
Building are the #1 CO2 emitter of any industry, that they produce 39 % of CO2
Emissions, 12 % of Water Use, 65 % of Waste Output, 71 % Electricity
The Green Building Revolution: Advancing Sustainability at Exponential Speed 259

Consumption, and 40 % of Energy Use. These statistics are absolutely staggering

and any Green Building Methodology that helps reduce these consumption statis-
tics has a positive impact on our society.
Rule 6. We already discussed that Building are the #1 CO2 emitter, they produce
39 % of CO2 Emissions, 71 % Electricity Consumption and 40 % of Energy Use.
Any Green Building Methodology that reduces these statistics has a positive impact
on society. We are well-versed in LEED, thus LEED will be the basis for discussing
Green Building Processes.

4.1 Global Green Building Reporting Systems: Wikipedia

(2011)

• Australia: Nabers/Green Star

• Brazil: AQUA/LEED Brasil
• Canada: LEED Canada/Green Globes/Built Green Canada
• China: GBAS
• Finland: PromisE
• France: HQE
• Germany: DGNB/CEPHEUS
• Hong Kong: HKBEAM
• India: Indian Green Building Council (IGBC)/GRIHA
• Indonesia: Green Building Council Indonesia (GBCI)/Greenship
• Italy: Protocollo Itaca/Green Building Council Italia
• Japan: CASBEE
• Korea: KGBC
• Malaysia: GBI Malaysia
• Mexico: LEED Mexico
• Netherlands: BREEAM Netherlands
• New Zealand: Green Star NZ
• Philippines: BERDE/Philippine Green Building Council
• Portugal: Lider A
• Republic of China (Taiwan): Green Building Label
• Singapore: Green Mark
• South Africa: Green Star SA
• Spain: VERDE
• Switzerland: Minergie
• United States: LEED/Living Building Challenge/Green Globes/Build it Green/
NAHB NGBS/International Green Construction Code (IGCC/ENERGY STAR)
• United Kingdom: BREEAM
• United Arab Emirates: Estidama
• IAPGSA Pakistan Institute of Architecture Pakistan Green Sustainable
Architecture
260 J.S. Seigel

• Jordan: EDAMA
• Czech Republic: SBToolCZ

4.2 What Is the LEED Green Building Reporting Process?

USGBC (2012) created LEED, or Leadership in Energy and Environmental Design,

as an internationally recognized Green Building Certification System providing
third-party verification that a building or community was designed and built using
strategies intended to improve performance in metrics such as energy savings,
water efficiency, CO2 emissions reduction, improved indoor environmental quality,
and stewardship of resources and sensitivity to their impacts. Developed by the
USGBC in March 2000, LEED provides building owners and operators with a
framework for identifying and implementing practical and measurable green build-
ing design, construction, operations and maintenance solutions.

4.3 What LEED Delivers?

LEED-certified buildings are designed to:

1. Lower operating costs and increase asset value
2. Reduce waste sent to landfills
3. Conserve energy and water
4. Healthier and safer for occupants
5. Reduce harmful greenhouse gas emissions
6. Qualify for tax rebates, zoning allowances and other incentives in many cities

4.4 LEED Rating Systems

1. New Construction (NC)

2. Existing Buildings: Operations & Maintenance (EB: O&M)
3. Commercial Interiors (CI)
4. Core & Shell (CS)
5. Schools (SCH)
6. Retail
7. Healthcare (HC)
8. Homes
9. Neighborhood Development (ND)
The Green Building Revolution: Advancing Sustainability at Exponential Speed 261

Rule 7. There are different types of LEED Rating Systems: New Construction
(NC), Existing Buildings (EB): Operations & Maintenance (EB: O&M), Commer-
cial Interiors (CI), Core & Shell (CS), Schools, Retail, Healthcare, Homes, Neigh-
borhood Development. Step One: select your Rating System.

4.5 LEED Scorecards and Points System

USGBC/LEED 2009 for New Construction/Major Renovations Project (2012)

1. Sustainable Sites 26 Possible Points
2. Water Efficiency 10 Possible Points
3. Energy and Atmosphere 35 Possible Points
4. Materials and Resources 14 Possible Points
5. Indoor Environmental Quality 15 Possible Points
6. Innovation in Design 6 Possible Points
7. Regional Priority 4 Possible Points
100 base points; 6 possible Innovation in Design and 4 Regional Priority points:
Certified 40–49 points
Silver 50–59 points
Gold 60–79 points
Platinum 80+ points
Rule 8. The LEED System is based on 100 points and has four levels: Certified:
40–49 points, Silver: 50–59 points, Gold: 60–79 points and Platinum: 80+ points.

4.6 Five LEED Categories

1. Sustainable Sites
2. Water Efficiency
3. Energy and Atmosphere
4. Materials and Resources
5. Indoor Environmental Quality

Sustainable Sites
Site selection and development are important components of a building’s
sustainability. The Sustainable Sites category discourages development on
previously undeveloped land; seeks to minimize a building’s impact on
ecosystems and waterways; encourages regionally appropriate landscaping;
rewards smart transportation choices; controls storm-water runoff; and
promotes reduction of erosion, light pollution, heat island effect and
construction-related pollution
(continued)
262 J.S. Seigel

Water Efficiency
Buildings are major users of our potable water supply. The goal of the Water
Efficiency category is to encourage smarter use of water, inside and out. Water
reduction is typically achieved through more efficient appliances, fixtures and
fittings inside and water-conscious landscaping outside
Energy and Atmosphere
According to the U.S. Dept of Energy, buildings use 39 % of the energy and 74 %
of the electricity produced each year in the US. The Energy and Atmosphere
category encourages a wide variety of energy-wise strategies: commissioning;
energy use monitoring; efficient design and construction; efficient appliances,
systems and lighting; the use of renewable and clean sources of energy,
generated on-site or off-site
Materials and Resources
During both the construction and operations phases, buildings generate a lot of
waste and use large quantities of materials and resources. The Materials and
Resources category encourages the selection of locally, sustainably grown,
harvested, produced and transported products and materials. It promotes waste
reduction as well as reuse and recycling, and rewards the reduction of waste at
a product’s source
Indoor Environmental Quality
The U.S. Environmental Protection Agency estimates that Americans spend about
90 % of their day indoors, where the air quality can be significantly worse than
outside. The Indoor Environmental Quality category promotes strategies that
improve indoor air as well as those that provide access to natural daylight and
views and improve acoustics

Rule 9. Green Building Process: Select your Rating System (New Construction,
Healthcare, Schools, etc.). Develop a LEED Strategy/LEED Plan addressing five
Green Building Categories: Sustainable Sites, Water Efficiency, Energy and Atmo-
sphere, Materials and Resources and Indoor Environmental Quality. Add up your
selected points and decide which LEED Level to pursue (Certified, Silver, Gold or
Platinum). Remember, the higher the LEED Level (Gold and Platinum), the more
difficult to attain and the higher the cost. Tweak your LEED Plan to ascertain your
results; you may not achieve or be awarded every point you pursue.

4.7 Green Building Impact on Corporate Sustainability

McGraw Hill/USGBC (2012) states that by 2009, 80 % of Corporate America was

expected to engage in “Green” at least 16 % of the time; and 20 % engaged 60 % of
the time. The author has been working with LEED/Green Building Programs at
Pepsi HQ, Nestle Waters HQ, Starwood HQ, USAA, Bank of America, GE, USAA
and many others. The author has noticed an exponential increase in Corporate
Green Building practices and we expect these practices to become more prevalent;
we have also noticed that the cost for these “Green Building” improvements are
getting lower and more affordable. Green Building has become a primary
The Green Building Revolution: Advancing Sustainability at Exponential Speed 263

component in their Sustainability/CSR Programs and discussed in their Annual

Reports, Sustainability/CSR/GRI Reports, Stakeholder Meetings, etc.
Rule 10. Corporations are embracing “Green” Technologies/Corporate
Sustainability. Sustainability and The Triple Bottom Line are integrally related to
Green Building; it is imperative to understand how these three concepts correlate.
Green Building is a component of Sustainability and the Triple Bottom Line,
dealing with the environment, social justice, education, conservation, carbon reduc-
tion, etc. The context of “Green Building” is much broader than constructing or
renovating a building.

5 Conclusion

The author is privileged to share this research with you, discussing the benefits of
Green Building Practices and how they are becoming globally embraced. To
conclude this chapter, the following facts illustrate the importance of implementing
and enforcing Green Building Practices.
– Buildings emit more CO2 than any other industry. In the US, the Building Sector
emits 39 % of CO2, more CO2 than the Transportation or Industry Sectors.
– Buildings are responsible for 39 % of CO2 Emissions, 71 % Electricity Con-
sumption, 40 % of Energy Use, 12 % of Water Use and 65 % of Waste Output.
– Green Building Processes have a huge impact on CO2 Reduction and Energy,
Water and Waste Reductions. Green Buildings reduce CO2 Emissions by
33–39 %, reduce Energy Use by 40 %, reduce Water Use by 40 % and reduce
Waste Output by 70 %.
– Corporations are embracing “Green” Technologies and implementing them in
their Sustainability/CSR/Stakeholder Programs. Corporations believe that Green
Building makes good business sense.
– Lastly, the author believes that eventually, there will be no Green Building
Methodologies of Scorecards; all buildings will be built with standardized
energy and water efficiencies, recycled materials, and improved indoor air
quality (low VOC paints, adhesives, carpets). More cities, states and countries
will develop mandatory Standardized Green Building Codes that will be
implemented and enforced.
The reader has been educated on Green Building definitions, statistics, issues
and processes. What can you do as individuals, cities, countries? Green Building
Practices are readily available and many strategies can be implemented at relatively
low costs. You can spread the word that Green Building has a huge impact on the
sustainability of our society and planet to our companies, communities, states and
countries. You can share the economic and social benefits of Green Building. You
can share the simplicity of Green Building. Ultimately, Green Building practices
will be codified at some point; perhaps in the form of local, national or global Green
264 J.S. Seigel

Building Codes. However, government solutions are embraced and enacted very
slowly. You can start the process immediately by sharing this research one person at
a time; one building at a time; one step at a time.

References1

BREEAM (2012) Overview of BREEAM Green Building Method. Available at http://www.

breeam.org (2012)
Brundtland Commision (1987) Definition of sustainability. Available at http://www.un.org/wcm/
webdav/site/climatechange/shared/gsp/docs/ (2012)
Earth Chater Website (2012) Definition of the Triple Bottom Line. Available at http://www.
earthcharterus.org
Environmental Protection Agency (2012) Definitions of both sustainability & Green Building.
Available at http://ww.epa.gov/sustainability/basicinfo.htm (2012) and http://www.epa.gov/
greenbuilding/pubs/about.htm (2012)
Google (2012) Available at http://www.google.com (2012)
Green Globes (2012) Overview of Green Globes Green Building Method. Available at http://
www.greenglobes.com (2012)
Green Star (2012) Overview of Green Star Green Building Method. Available at http://www.gbca.
org.au (2012)
US Department of Housing (2012) Definition of Green Building. Available at http:www.hud.gov/
offices/hsg/omhar/paes/greenini.cfm (2012)
US Green Building Council (2012) Overview of LEED Green Building Method, Bulk of Green
Building Data, Statistics, Charts Used in This Article. Available at http://www.usgbc.org
(2012)
Wikipedia (2012) Available at http://www.wikipedia.org (2012)

1
The bulk of the data, statistics and charts used in this Green Building Chapter was provided by the
US Green Building Council/USGBC (2012) – www.usgbc.org. Most of the other references were
used primarily for basic terminology definitions.
Existing Buildings’ Energy Upgrade:
An Economical and Environmentally
Sustainable Opportunity

Anna Laura Pisello and Franco Cotana

1 Introduction

Building energy conservation has become a crucial issue both for environmental
and economical perspectives of the global problem. In despite of all the Interna-
tional pressure for improving buildings’ energy performance, the global economic-
financial crisis is delaying this process, given also several market barriers. At the
same time the building sector represent the 36 % (Green Building Council 2011a)
of total global energy consumption, and there is a huge opportunity for both
companies and buildings’ owners to obtain environmental benefits with profitable
investments.
In these years a huge research effort has been focused on energy performance
optimization through several interesting methods for assessing building energy
efficiency (Pisello et al. 2012a) also involving a complex multi-building approach
for reducing the energy requirement of specific urban contexts (Pisello et al. 2012b;
Xu et al. 2012).
Given the slow buildings’ renovation rhythm, also exasperated by the actual
global crisis, the upgrade interventions are assuming an increasingly important role
in the built environment scenario. For this reason the purpose of this contribution is
to answer several questions about building energy performance improvement,
involving both engineering and economics issues. At the beginning of this chapter
we will explain what specifically the retrofitting procedures are, which could be the
main engineering interventions on buildings, and which could be the typical market
barriers against the implementation of the process.

A.L. Pisello (*) • F. Cotana

Department of Industrial Engineering, University of Perugia, Via G. Duranti, 06125 Perugia,
Italy
Biomass Research Centre, Via G. Duranti, 06125 Perugia, Italy
e-mail: [email protected]; [email protected]

P. Taticchi et al. (eds.), Corporate Sustainability, CSR, Sustainability, Ethics & Governance, 265
DOI 10.1007/978-3-642-37018-2_13, © Springer-Verlag Berlin Heidelberg 2013
266 A.L. Pisello and F. Cotana

The start-point of this contribution is the research related to buildings’ energy

retrofitting procedures in terms of engineering practice (Ge et al. 2009) and in terms
of operations management through continuous commissioning practice (Liu et al.
1997; Pisello et al. 2012c). This specific procedure is often able to achieve impor-
tant energy conservation amounts with low-cost interventions on existing buildings.
Considering also the necessity to apply an effective integrated process, this
contribution provides an interesting interpretation while coupling technical and
economical perspectives of the complex issue. The case study assessment translates
this approach into operative practice guidelines, giving us the possibility to relate
the engineering interventions to the benefits in terms of energy requirement reduc-
tion and indoor comfort optimization, and finally to the economical-financial effort.

2 What Is Building’s Energy Retrofit

The energy efficient retrofit is a complex of procedures that involves multiple

disciplines. It is aimed at improving buildings’ energy efficiency, indoor comfort
conditions, and also at reducing the building life-cycle environmental impact.
The retrofit subject starts with an energy assessment but it necessary involves an
exhaustive investigation of both the economic and the environmental side of the
complex issue. In fact the improvement of buildings’ energy efficiency is not the
only purpose of the retrofit, because the cost-effectiveness and the environmental
variables are the protagonists of this issue as well.
The retrofit path begins with the building energy audit to figure out where, when,
why and in which way energy is used following efficient or inefficient procedures.
A careful energy audit is the most performing tool for outlining the building energy
performance with respect to all the equipment. The beginning purpose is indeed to
draw the scenario Zero, that is the scenario before the retrofit. Walking through the
energy audit allows to the progressively understanding of these main features:
– The equipment energy consumptions trends and costs,
– The indoor thermal behavior and the relative indoor comfort conditions in
different locations within the space,
– The occupants’ satisfaction level with respect to each specific building use:
retail/commercial, industrial, office space, residential, etc.
– The operation and maintenance strategies already implemented within the build-
ing controls.
With all these elements we are able to discover the power consumption of every
individual equipment, its energy efficiency, and its capability to achieve indoor
comfort conditions with respect to the cost level corresponding to the baseline
(scenario Zero).
Applying this procedure for example to the lighting system, we can evaluate the
system energy consumption for the scenario Zero, indoor comfort failures, possible
improvement in reducing consumption achievable with new efficient technologies,
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 267

relative costs and benefits, etc. In this way we can mark out several strategies that
could be implemented considering different project goals. For example we can
define profitable procedures to achieve different budget levels, comparing the
results with the specific project budget constraint; or different comfort levels.
Building retrofit purpose could also involve several innovative procedures if we
need to implement specific innovative technologies, that could make us able to
obtain specific acknowledgments and credits.
In every retrofit activity the project goal clear definition is the first step of the
integrated design process. Building energy retrofit is indeed a complex procedure
that needs deep and fertile integration of different competences, to achieve the
project goal in terms of energy efficiency, environmental impact and cost
effectiveness.

2.1 Buildings Environment and Benefits of the Energy

Upgrade

The purpose of this analysis is to outline an explicative and objective panorama of

the building energy improvement, trying to make order within the vortex of
information coming from different market and energy sources.
What it is already acknowledged is that improving energy efficiency through a
successful strategy is important for several reasons. It allows to reduce utility bills
of energy and water, to optimize indoor comfort level, to extend the life of all the
equipment, and to finally reduce the environmental impact due to the facilities
management improvement.
Within this complex scenario the main difficulty is the quantification of the
financial and environmental benefits that these green strategies provide. In fact
there is often no objective comparison with the conventional buildings’ construc-
tion practice and financial mechanism. Thus this is the main reason why it is still
difficult to quantify these interventions in a coherent way with respect to traditional
types of investments. Also the common benefits, such as energy savings, should be
looked at through a life cycle cost assessment, not just assumed in terms of upfront
costs. In fact it is obvious that from a life cycle savings standpoint, each saving
source coming from investment in sustainable retrofit dramatically exceed any
additional upfront costs (Kats et al. 2003).
Thus the questions we should answer now are not just based on the specific
activity cost effectiveness, even if in the following paragraphs we will deal with this
issue as well. But the strategic questions to answer should concern all the sources of
benefits that energy retrofit is able to carry out for companies, not just limiting the
issue to a common source of investment, and the relative cash flow.
Building energy upgrade has to be seen by companies as an intelligent path to
save money of course, but at the same time, to improve brand public image and
affiliates productivity concerning the environmental satisfaction, lowering
268 A.L. Pisello and F. Cotana

absenteeism and healthcare costs, refreshing employee attention and affection to

the purpose. The retrofit path will lead to the competitive differentiation, the
sustainability and brand equity improvement, with relatively modest cost.
All these remarks arise from a buildings’ environment picture of reality all over
the world that points out the oncoming upgrade demand on existing buildings
estate. According to facts, all over the world buildings account for more than one
third of the global greenhouse gasses (Green Building Council 2011b). Despite the
International policies constraints the projections over the next 25 years forecast a
growing of CO2 emissions from buildings that is faster than those from any other
sector. In particular commercial building will increase this, growing velocity of
1.8 % a year through 2030 (U.S. Green Building Council press release 2007).
Focusing on urban environment, buildings are responsible for more than 50 % of
greenhouse gas emissions in most cities and for more than 70 % in largest cities
such as New York and London (William J. Clinton Foundation 2011). Thus, given
the necessity to reduce the environmental stress operating on buildings
sustainability optimization, it is actually trivial to understand that a methodical
action on existing buildings is actually necessary, given that buildings yearly new
construction is close to 1 %.

2.2 Market Growing Attention and Obstacles Along the Way

Analyzing the most recent information collected by the Energy Efficiency Indicator
global survey in 2011 (Institute for Building Efficiency 2011), there is an undeni-
able increasing attention paid on controlling energy consumptions and optimizing
building energy efficiency (Fig. 1 [Institute for Building Efficiency 2011]). Only the
3 % of the participants to the survey, that have the complete market and energy
responsibility of their buildings, declares to have not forecasted any energy reduc-
tion for 2012, while the 58 % expects to reduce energy consumption following
internal or public purpose of energy retrofitting.
Despite the proven energy and economical opportunity to optimize energy
efficiency of existing buildings, a huge amount of potential is still contributing to
the “energy efficiency gap”, especially for those companies and households where
energy efficiency does not represent the highest financial concern compared to
other sources of cost.
With respect to the data concerning the energy use in buildings (industrial,
institutional, commercial, and residential sector), it is possible to outline typical
barriers to buildings energy uograde. These are:
– Huge settlement effort: a successful building energy upgrade is still perceived
like a insurmountable amount of time consuming operations for analyzing
different strategies, that are not often managed by the same person, company
or authority.
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 269

Fig. 1 Companies that identify energy management as extremely or very important

– Public barriers: they are actually due to the instability of public energy policies,
that are often more focused on energy supply issue than energy efficiency
improvement (GreenMax Capital 2009).
– Lack of information and awareness about opportunities: many occupants of
residential buildings or small companies are not conscious about the effective
results of retrofit, both from an energy and environmental field, and also from an
economical point of view. Furthermore, for example in households sector,
energy performance is still related to social and private occupants’ attitude.
Many studies demonstrate the huge effect of human and social attitudes in
reducing building energy use (Xu et al. 2011) and that the average time needed
to implement new technologies within the attitudes is about 4 years (de
T’Serclaes 2007).
– Chaos in the energy price perception: the common perception about energy price
is often unclear and governed by time-variable public subsides that for sure help
the market running, but at the same time, they contribute to create a sort of fog
perception about effective costs. This element also aggravates the first barriers
just described.
– Lack of technical expertise: the reference people usually addicted to energy
retrofitting, especially for single houses or small interventions, are still often
focused just on one specific ring of the energy chain. Thus it is often necessary to
consult different people from different organizations to achieve a complex and
successful building energy retrofit, with the relative analysis of the intervention
cost-effectiveness. This tortuous path makes the retrofitting less accessible and
attractive for both households and companies.
– Energy saving randomness: the saving prediction is deeply related to the effec-
tive building operations, occupants’ behavior and equipment maintenance pro-
cess following the retrofit. This element contributes to give the impression that
achievable benefits and related investment payback is not really quantifiable. At
the same time ex post energy monitoring and continuous commissioning is
reasonably applicable just in large retrofitting interventions. Thus this barrier
impacts especially small buildings’ owners.
270 A.L. Pisello and F. Cotana

– Indirect link between investment and consequent benefit: in the retrofitting

process often the decision maker, or the building owner, is responsible for the
retrofitting investment, but he is often not the direct beneficiary of the energy
saving benefits. That is the reason why this kind of market has to be assessed
considering several kinds of benefits, not just maintaining the traditional cost-
benefit criteria. At the same time the decision maker can take advantage from
other sources that are difficult to quantify, like higher rents, public incentives,
brand image.
The analysis of upgrade constraints make frankly understand the multipurpose
issue, for all the reasons just mentioned. There are indeed so many externalities that
cannot be assessed through a single judgment criteria. Analyzing the energy
retrofitting drivers (Institute for Building Efficiency 2011) all over the world,
even if there is an increasing attention to the energy management, the main purpose
is the financial benefit, and the main barrier is related to the investment cost. The list
below represents the global 2011 classification of the drivers of efficiency with
respect to the companies’ perception about the energy efficiency interventions’
implementation:
1. Energy cost saving
2. Government incentives and rebates on utilities prices
3. Brand public image green improvement
4. Increasing energy security
5. Greenhouse gas reduction
6. Existing facilitation policies.
In this phase of the analysis it is important to deepen the barriers specifically
related to the financial effort of the energy improvement investment. First of all the
initial cost of the investment is often a barrier difficult to overcome, especially
during International economic crisis periods like this. The risk associated to the
investment is often made huger by the difficulty to monitor the real benefit after
retrofitting. These same benefits are the result of many factors involving both
technical improvements (energy equipment and controls efficiency) and human
features (increasing awareness and social constraint). Also the discount rate, being
related to the investment risk level, could be seen as a random variable for the
reasons just explained. And for the same reasons the traditional opinion views the
energy efficiency investments more risky than reality, when they are naturally able
to reduce the dependence to the randomness of the fuel price.
Another fundamental element is the payback time. During last years experience
the building retrofitting investments were perceived as long-term investments just
for the lack of ability in assessing and monitoring the following benefits. This
misunderstanding is also demonstrated by the building’s lifetime that is naturally
longer than 30 years, and that naturally makes this kind of intervention particularly
appropriate. In the case study section of this chapter we indeed will deal with one of
the several successful retrofit investments, where the beginning assumption was to
reach a payback time shorter than the lease period at all.
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 271

3 Main Building Energy Upgrade Initiatives

The purpose of this section is not to give a technical explanation of possible

retrofitting strategies, because there is already a very exhaustive literature
concerning different strategies. On the contrary in this phase we want to introduce
the whole-building approach specifically aimed at analyzing, comparing, and
optimizing the effectiveness of each action.
The main focus of the whole-building upgrade approach is not to look at
individual technologies, trying to maximize the effect of each technology indepen-
dently. By this time real experience is able to demonstrate that the best result in
terms of energy saving could be reached by the optimization of the single strategies,
integrated within a whole complex initiative that could involve both stand-alone
buildings but also network of buildings. Typical energy savings amount arise up to
30–50 % given by a whole-building energy improvement, while focusing on just
one technology, the typical saving potential hardly passes the 5 % of whole energy
saving.
The most representative example of this approach is the Empire State Building
initiative. In this chapter we will specifically analyze a successful global upgrade
within this building as case study. The Empire experience have linked several needs
about energy optimization, environmental pressure, sustainability issue, cost-
effective requirement. Starting from many different input data, the program
achieved 38 % of energy saving by implementing a smart system of interventions
with a 3-year payback time of the whole investment. The approach consisted of the
integration of several measures from the very beginning of the design process. The
beginning phase consisted of the assessment of all the possible ideas proposed by
several groups, that were more than 60, through periodical charrettes and several
presentations organized within integrated review workshops. With the same meth-
odological approach also the building energy audit was completed. Following these
previous findings, it was possible to outline a list of potential facility improvement
measures aimed at balancing:
– The energy performance optimization
– The carbon footprint reduction
– The maximization of the energy savings
– The positive net present value.
Through the integrated continuous approach, each implemented strategy was
chosen and designed considering both single and multiple effects optimization. So
for example a renovation of a thermal equipment technology is placed side by side
to a passive strategy in order to achieve single benefit related to each technology but
also to optimize the mutual effectiveness of multiple interventions. At the Empire
this comprehensive approach guided the renovation of the chillers, just after
reducing the 30 % of the cooling requirements by windows insulation improve-
ment. Thus the complex intervention at the Empire has concerned eight projects
mutually interacting to reach the final 38 % energy saving (Fig. 2).
272 A.L. Pisello and F. Cotana

Fig. 2 Reduction of energy requirement within the ESB due to integrated energy retrofits
interventions

The Empire Experience created a replicable sustainability model that involves

innovative design techniques and O&M (Operation and Management) (Piette et al.
2001) strategies for promoting environmental integrated strategies in existing
buildings.
Given the key role of operational efficiency in existing buildings, next section
will specifically concern building retro-commissioning/re-tuning as fundamental
and relatively inexpensive tool for improving energy efficiency and reducing green-
house gasses emissions due to buildings life cycle.

3.1 Improving Control and Operations Strategies

In this section we analyze a specific kind of building energy upgrade based just on
equipment operations and BEMS (Building Energy Management Systems)
techniques (Doukas et al. 2009). The main techniques and the potential benefits
of improving building’s energy efficiency through operational and control
improvements are assessed. This method, also named “building re-tuning (Hatley
et al. 2011)”, consists of identifying fruitful operations changes that could achieve
energy and economical benefits and other possible problems requiring intervention
or repair through no-cost or low-cost methods.
Continuously monitoring and solving buildings’ operational problems for reduc-
ing energy waste are primarily implemented through modifications on the building
control system. This kind of actions are mainly no-cost strategies or they could
involve few low-cost improvements typically with less than 3 years payback time
(Hatley et al. 2011). Building re-tuning includes the identification and the compari-
son in terms of energy efficiency and cost-effective potential of several
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 273

Fig. 3 Building energy typical trend with respect to different commissioning strategies

opportunities for improving energy efficiency. This continuous commissioning

program consists of several operations with respect to different building’s use and
energy plants typologies (Fig. 3 [Hatley et al. 2011]). The main intervention areas
are:
– Building’s occupants re-scheduling, with respect to the real occupants behavior;
– Temperature and pressure control of the discharge air;
– Heating and cooling control of the Air Handling Units (AHU);
– Management of the fresh air of AHU and economization procedures;
– Intelligent energy zoning, with respect to the monitored thermal zones
requirements;
– Actions on the central plant technology and control system.
This kind of intervention on existing buildings could be implemented through a
technical sequence consisting of these basic steps:
– Building beginning information;
– Data collection and analysis;
– Identification of operations troubles and outline of resolution procedures;
– Strategies implementations;
– Findings and verification of the improvements;
– Analysis of the impacts in terms of energy and economic benefits.
Collecting preliminary building information means to gather building features
that could be useful for the following operative phase. These informations are
typically already known by managers and operators. They consists in outlining
the overall building design (shape and geometry), defining the main energy
equipments of the HVAC system. Another important step consists of the definition
of the thermal zones with their equipment features and the typologies of the
automation and control system.
The following step consists of investigating potential operational issues that
require time history analyses and optimization improvements. After this, the effec-
tive intervention is scheduled through a monitoring plan where all the relevant
parameters are collected and trend logs are implemented in the control system.
274 A.L. Pisello and F. Cotana

During the fulcrum of the retuning process operators and control managers are
able to analyze the trend-data and begin to implement the first interventions. For
making them able to do this, a specific training could be very useful for achieving
the best optimization result (Bobker et al. 2011). Starting from the assessment of the
building meter profile, many important elements could be registered, such as the
energy demand and time of use, occupied/unoccupied periods and other weekend
events. They could lead to specific improvement strategies concerning the
rescheduling with respect to occupants attitude especially during night hours,
weekends, and holidays.
After walking down through the building, it is the time to use the knowledge
learned from trend data (PNNL 2011), report all the findings, and choose the design
optimization strategies for energy saving. Then it is possible to calculate the year-
round energy performance before and after those techniques implementation within
the same building. Given the necessity to report and demonstrate the actual energy
consumption and savings, it is very important the monitoring process and the
building simulation procedures, that are assuming a crucial role within the whole
building energy upgrade approach.
Results and findings could also represent the baseline for elaborating and
implementing an exhaustive decision support model, hopefully based on the
BEMS typical logic (Levermore 2000), able to integrate all the decisive
components. To obtain fruitful results, these components typically are (Doukas
et al. 2007):
– The sensors’ system, that comprehends all the indoor and outdoor sensor for
monitoring energy performance and thermal behavior concerning the building
environment;
– The controller equipment, that involves all the valves and actuators;
– The decision support unit, that is able to link the sensors results with the
intelligent system techniques for selecting and applying appropriate
interventions. This is also the specific function aimed at communicating with
building’s operators through specific interfaces system.
– The building energy database, that collects all the building’s data useful for
implementing the procedure.

4 Case Study Analysis

Given the main role of the ESB (Empire State Building) as a distinguished
prototype for demonstrating the economic and environmental benefits of energy
upgrading of buildings, in this section a specific case study within the ESB will be
analyzed as “platinum” sustainability intervention.
This case study concerns the office green improvement (Heider and Hartley
2010) of the Swedish construction company Skanska, that occupies the whole 32nd
floor of 2,267 m2 (24,400 ft2) space. The model project mission was to create a
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 275

Fig. 4 Natural daylight

available at the office
workstations of Skanska
office

LEED Platinum interior space, with the same budget of a traditional high quality
office that could represent a sustainability prototype. The project was also aimed at
realizing a comfortable work environment for up to 90 people, with modern and
flexible space organization, and the cost-effectiveness of every solution was
analyzed within the mission of a less than 5 years ROI value.

4.1 Design Approach for Maximizing Sustainability Benefits

of the Retrofit

The design process mission consisted of maximizing the energy efficiency and the
occupants’ individual controls, the outside natural view and daylight potential
(Figs. 4 and 5), tracking all costs and monitoring energy use, with the zero
construction waste trough recycling and reusing procedures.
The project consisted in the integration of several architectural and engineering
solution and the post-intervention electricity demand was monitored and compared
with the previous Skanska high quality office space in Manhattan. After the first
year of monitoring Skaska operator were able to register a 57 % of electricity costs
with respect to the previous office. So the 15-years saving forecast becomes more
than $650,000, considering just the electricity requirements (Tables 1 and 2 [Heider
2011]).
Currently the monitoring system at ESB is able to measure and monitor all the
equipment and utilities consumptions. Thus the Skanska new office space could
represent a perfect example and baseline reference for future green retrofits. The
year-round energy saving associated to the retrofit is more than 185,000 kWh (from
about 211 kWh/m2per year to about 91 kWh/m2per year with reference to the ESB
276 A.L. Pisello and F. Cotana

Fig. 5 Outside view of

Manhattan from Skanska
office at ESB

Table 1 Energy study: utility consumption of the previous Skanska high quality office in
Madison Avenue, NY, NY
136 Madison Ave (high quality office)
Total
2008 annual, Comparison
JAN actual FEB actual MAR actual actual annual
Cost [$] 3,677 3,921 4,209 57,506 85,039
Consumption [kWh] 13,760 15,520 17,920 220,853 326,595
Avg cost per kWh 0.27 0.25 0.23 0.26 0.26
Energy cost/rentable SF 0.22 0.24 0.26 2.36 3,49

office conditioned space). The two main comfort and efficiency improvements were
the windows full height scheme and the under-floor air distribution system. The first
one guaranteed the daylight to 99 % of occupants with the transparent area by 19 %
of the external partitions, achieved by the full exposure windows (6’-4” height).
Following the energy model of the under-floor air system, Skanska engineers
predicted 27 % of energy saving for the reduction of the static pressure, with the
consequent reduction of the fan energy use, and the increase of the supply air
temperature. Large energy saving was also achieved by installing variable-
frequency systems, able to control and regulate the airflow with respect to the
real indoor requirements.
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 277

Table 2 Energy study: utility consumption of the new Skanska office at Empire State Building
Empire State Building, 32nd floor LEED Platinum
Total
2009 annual Comparison
JAN actual FEB actual MAR actual actual annual
Cost [$] 1,989 1,987 2,500 34,358 345,718
Consumption [kWh] 10,516 10,506 11,686 173,996 173,996
Avg cost per kWh 0.19 0.19 0.21 0.19 0.19
Energy cost/rentable SF 0.08 0.08 0.1 1.41 1.87

According to ASHRAE Standard 90.1-2010 (ASHRAE Standard 2010), the

lighting system comprehended LED lamps in all the workstations and further
optimization results were reached by installing occupancy sensors and daylight
dimming controls.

4.2 Economic and Environmental Benefits

Thanks to the possibility to know the retrofit project and the operational costs, it is
possible to analyze the life-cycle assessment of the intervention at Empire State
Building.
In despite of the beginning costs of $4,624,262, that is higher than a traditional
best quality office, the amount of the investment is going to pay for itself in 5 years
(ROI less than 5 years). The project also benefited from the NYSerda (New York
State Energy Research & Development) grant by $20,527, achieving a net gain of
$492,869 (Table 3)
Another issue to consider in retrofit interventions is the indoor environmental
benefit provided by HVAC improvement and specific comfort optimization
strategies. Variable Air Volume diffusers allowed to bring additional outdoor air
when necessary for high density zones. Specific attention was paid to the environ-
mental quality of materials and resources such as carpeting, paints, adhesives, wood
furniture. The indoor air quality was also guaranteed by high performance filters
(MERV 13). Following the LEED for Commercial Interior guidelines also the
water use was controlled and reduced by 40 %, providing high water efficient
equipment.
The global environment benefits of Skaska office space retrofit is translated into
a carbon footprint analysis. This analysis showes an equivalent CO2 emission
reduction by almost 80 t per year1 (Table 4).

1
Considering the New York City conversion factor of 0.86 lb CO2/kWh.
278 A.L. Pisello and F. Cotana

Table 3 Project cost analysis Total project cost

summary
High quality office budget [$] 4,413,404
Actual costs [$] 4,624,262
LEED premium [$] 210,858
Energy saving (NPV for 15 years) [$] 683,200
NYSERDA grant [$] 20,527
Net positive [$] 492,869

Table 4 Environmental Carbon footprint analysis

impact of the project: carbon
footprint calculation Annual kWh (Traditional high quality office) 326,595
Annual kWh (@ ESB, 32nd floor office) 141,383
Annual saving [kWh] 185,212
NYC CO2 footprint for electricity 1.72 kg/kWh
Carbon footprint reduction [tons/year] 683,200

5 Conclusions

In this chapter an integrated assessment of building energy upgrade is proposed

considering several aspects that necessary interact within this issue. This contribu-
tion deals with a preliminary technical explanation about what building retrofit is,
followed by an evaluation of the most common technical practices and innovative
solutions. Also a global economical assessment is reported, specifically concerning
market barriers and typical barriers also related to the current peculiar economic
global situation. The purpose of this integrated analysis is to provide a method for
evaluating and choosing the most fruitful global energy upgrade strategy with
respect to different variables. This assessment method could provide a flexible
tool for guiding the communication between different actors of the integrated
process. The project team of the building energy upgrade intervention has to be
formed by technicians, operators, designers, stakeholders, etc. The highest barrier
against the building energy improvement success is often represented by the huge
gap between these different skills we are trying to link following the proposed
approach.
Given the huge environmental pressure, the reduction of the environmental
pressure attributable to the built environment through this kind of integrated
strategies is becoming always more relevant. Also, considering the economic global
crisis, we analyze in particular no-cost and low-cost procedures for optimizing
energy saving through operations and management strategies.
Also the case study represents a very useful prototype of integrated design for
existing building energy upgrade. In facts the Skanska office space at the Empire
State Building could became an useful example for guiding future improving
interventions by integrating the energy approach with the indoor comfort issue
and the economical and environmental constraint.
Existing Buildings’ Energy Upgrade: An Economical and Environmentally. . . 279

Acknowledgments The authors’ acknowledgements are due to:

Elizabeth J. Heider, AIA, LEED AP, senior vice president for preconstruction at Skanska for
providing a very exhaustive description of the retrofit intervention at ESB and for making us able
to use real Skaska energy data.
Michael Bobker, Director of Building Performance Lab, CUNY Institute for Urban Systems, for
providing important information of the re-tuning approach on existing buildings.
H2CU (Honors Center of Italian Universities) for supporting the International cooperation
among the authors of the book.

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