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Trying To Measure Sustainability

Studies that rank corporate sustainability performance are works in progress

by Alexander H. Tullo
April 19, 2010 | A version of this story appeared in Volume 88, Issue 16

Most people have an idea of what the word “sustainability” means, but ask them to define it and they’ll give different answers. Rudy Baum, C&EN’s editor-in-chief, defines sustainability as “learning to live off the sun in real time.” My own definition is “being able to keep on doing what you have been doing.”

Baum’s definition is about whether humanity will learn to live in perpetuity on renewable resources. Mine conjures asset bubbles, California’s budget deficits, and whether people will continue to buy books at Borders or from Apple. But my definition also encompasses companies’ ability to sustain their businesses on the resources they draw from the planet. And in that sense, these definitions, as well as most other ones, converge on the same basic idea.

For the concept of sustainability to be useful, though, it must be measurable so people can weigh alternatives and track progress. The best thing for sustainability would be bringing it under the heel of quantitative analysis.

And a growing number of reports do compare company sustainability performance. The Carbon Disclosure Project was established by institutional investors that have $55 trillion under management. CDP surveys companies for carbon dioxide emissions—a good proxy for sustainability—and carbon mitigation strategies. In the materials sector, BASF headed the most recent list. Other chemical firms, such as Praxair, PPG Industries, and DuPont, weren’t far behind.

Another well-known survey based on company-provided data is the Dow Jones Sustainability World Index. Among chemical companies, DSM, BASF, and AkzoNobel led in 2009, 2008, and 2007, respectively.

Working with the research firms KLD Research & Analytics, Trucost, and CorporateRegister.com, Newsweek magazine last year ranked U.S. companies according to environmental impact, policies, and reputation. Praxair, Eastman Chemical, Celanese, and Dow Chemical were among the top five basic materials firms on that list.

But the ranking that has captured my imagination is “Sustainable Value Creation by Chemical Companies,” put together recently by Sustainable Value Research, an organization of European researchers. The appeal of their study is that it eschews subjective factors such as strategy and reputation. Instead, it puts sustainability into monetary terms that are familiar to people in business.

The organization measured nine chemical companies according to 13 criteria such as number of employees, worker accidents, assets, research expenses, greenhouse gas (GHG) emissions, and hazardous waste. To come up with sustainable value, the researchers started with a company’s operating cash flow. They then divided this figure by units of resources used.

Here’s an example of how they calculated sustainable value created at BASF as a result of GHG emissions. For the year 2007, they divided BASF’s $7.7 billion cash flow by its 28.8 million metric tons of GHG emissions, yielding an efficiency of $267 per ton of GHGs. Then, the researchers took this number and measured it against the average performance of the entire group—$206 per ton of GHGs—to get $61 of value created by BASF relative to the group per ton of GHGs. This figure was then multiplied by BASF’s total emissions of 28.8 million metric tons to give the $1.8 billion of total value BASF created in the process of emitting GHGs.

Finally, all of the categories were averaged together to yield total sustainable value created. In BASF’s case, that’s $1.5 billion. According to this method, BASF, which helped fund the study, tops the ranking. Dow comes in last with minus $2.9 billion.

I applaud the European researchers for trying to quantify sustainability, but I have a few criticisms. For starters, nine companies isn’t a very big sample. Frank Figge, an author of the report, explains that not many companies disclose enough data to be included in the report. Some companies, for example, report GHGs for only some of their facilities.

In addition, the survey made Dow look like it has a shameful sustainability record. Yet by reporting a lot of sustainability data, Dow is taking a step that hundreds of chemical companies aren’t. It is, in fact, acting as an industry leader in this regard.

A couple of the categories used in the report, in particular R&D spending, are weak. According to the survey, Dow lost $199 million in sustainable value in 2006 from R&D spending, while India’s Reliance Industries generated $3.6 billion. The implication is that Reliance does R&D better than Dow, but that isn’t necessarily so. A lot of what Reliance does—running supermarkets and the world’s largest oil refinery—has little to do with R&D. Dow, on the other hand, is being penalized in the survey for its more intensive R&D spending. Furthermore, it doesn’t make sense to compare R&D spending, which is meant to generate tomorrow’s cash, against today’s cash creation.

Despite these shortcomings, I think Figge and his colleagues are on to something. As more companies publish reliable data, as they ought to, the sustainable value approach may evolve into a reliable way for people to compare companies’ sustainability performance. That would be good for investors—and for the planet.

A copy of the report can be found at sustainablevalue.org/publications/downloads/index.html.

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