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Measuring Sustainability withIndicator Sets

National Technical University of Athens

Monday 4th April 2011

Professor Richard DartonDepartment of Engineering ScienceUniversity of Oxford

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Why is the measurement ofsustainability important?

“Sustainable Development is developmentthat meets the needs of the present,without compromising the ability of futuregenerations to meet their own needs.”Brundtland Report, 1987

Motivation

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Drivers on business, governments to pursuea sustainability agenda

Regulatory (policy makers)Investment opportunity (capital providers)Shareholder concern (capital providers)Purchasing power (consumers)

Electoral (voters)International pressure (foreign governments)Image and influence (pressure groups)

Motivation

MoralityEthicsFashionSelf-interest…

Your opinion,My opinion

Different people have different expectations fromsustainability. Measurements force consideration of thewhole picture, and frame the debate on priorities.

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“I often say thatwhen you can

measure what youare speaking about,

and express it innumbers, you knowsomething about it;

but when youcannot measure it,when you cannot

express it innumbers, your

knowledge is of ameagre and

unsatisfactory kind.”Lord Kelvin, 1883

William Thomson, Baron Kelvin(1824–1907),

by Lowes Dickinson, 1869Copyright: Master and Fellows of Peterhouse,

Cambridge

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sourcesRe

WealthEfficiency

Resources

WasteWealth

Maximising the efficiency of wealth creation is notsufficient for sustainable development.

Sustainable Development

EnvironmentEconomics

SocietyWe must balance wealthcreation with impacts onnatural capital, and society

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Traditional criteria are• Fitness for purpose• Economic viability• Compliance with HSE legislation

...but these criteria are not sufficient tojudge sustainability• The wrong process or product may bechosen• The solution may be unacceptable

But how do we balance the different impacts?

What criteria tell us whether one policy, projector product is “more sustainable” than another?

This is the role of sustainability metrics.

Metrics to measure progress

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How do we choose them?

Metrics to measure progress -choosing for a purpose

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Safe and efficientcontrol of acomplex processneeds hundredsof measurements(T, P, F etc.).Each one is anindicator of localperformance.

Overallperformance canbe presented interms of a fewkey indicators likeyield of gasolineper tonne offeedstock, or theprofit ($/day).

Catalytic cracker, ShellStanlow refineryPhoto: Shell UK

Metrics to measure progress -choosing for a purpose

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1. Clear definition of what is to be assessed,and why(Government policy, factory operation, etc)

2. the metrics must assess impacts on the different capitals -economic, environmental, societal

3. Coverage – key aspects must be included

4. Available data – quantifiable empirical data, not qualitativejudgements

5. Avoid duplication and needless complexity

6. Composites if appropriate (recognise weighting problem)

A set of metrics which is not planned for some definedpurpose is merely a collection of statistics.

Metrics to measure progressrequirements

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The HDI is a composite indicator used by the UNDP, basedon statistics for life expectancy, education and income.

Data from http://www.undp.org/

Metrics to measure progress- the Human Development Index

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eg Value added, margin, NIBT

eg raw materials used,materials recycled

Metrics to measure progressfor a manufacturing operation

eg absenteeism,promotions, wage andbenefit package ratio(top 10% relative tobottom 10%), HSE

The sustainability footprint measured by the set of 50 IChemE metricsSource: Darton RC Trans IChemE B 81 2003 295-302; www.icheme.org/metrics

(Resource usage)Energy

Materials

Water

Land

Atmospheric

AquaticProfit, value,tax

Investment

Workplace

Society

Land (Pollution)

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Metrics measure the interactions interms of the two perspectives• efficiency of using or enhancingcapital• fairness in distributing benefits anddisbenefits (including inter-generational)

interactions

interactionsinteractions

The business

A methodology for selectinga set of metrics for a business

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A. Overview of business

B. Definition of Sustainability

D. Sustainability frameworkAnalyse business to identify all significant impactson Sustainability domains - stores of value (capital)

Characterise these impacts with metrics

C. Definition of system boundary in time and spaceThe business overview in A must include all processes within theboundary

Process Analysis Method for selectinga set of metrics for a business

Source: Chee Tahir, A. and Darton, R.C. Journal of Cleaner Production 18, 1598-1607

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D. Sustainability framework

1. Sustainability domainsStores of value (capital)

2. Sustainability perspectives• resource efficiency• fairness in benefit/disbenefit

indicators reflect these

4. Identify issues associatedwith impact on External ImpactReceivers.EIR=guardian of capital

5. For each issue select anindicator

3. Identify Internal ImpactGeneratorsIIG=business process or policythat impacts a store of value

6. Quantitative measures foreach indicator - the metrics

Process Analysis Method for selectinga set of metrics for a business

Source: Chee Tahir, A. and Darton, R.C. Journal of Cleaner Production 18, 1598-1607

Palm Oil production, an example:Economic flows (part of the business analysis)

EconomicContributor

EconomicRecipient

Customer(MFC)

Capital provider(ECCP) Estate / Mill

Externality(Recipient)

Capital provider(ECCP)

Supplier andcontractor

(EDS)

Employee(EDE)

Government agency(EGDA)

Community(EDLC)

Primary moneyoutputMoney input

Secondary moneyoutput

Government agency(EGDA)

Product (EPM) Waste(EWM)

Environmental impact(EEIM)

Human resource(EHRM)

Utility & service(EUSM)

Material (EMM)

Value input

Value output

Economic efficiency indicators

Internal impactgenerator

Transmittingmedium

External impactreceiver

Economic issue Indicator* Metric for estate Metric for mill

Economic productmanagement

(EPM)Product Capital provider

Sale, earning andcost

Production volumeAmount of FFB produced by

quality

Amount of CPO produced byquality

Amount of by-productproduced by quality

Sale volume Amount of FFB sold by quality

Amount of CPO sold by quality

Amount of by-product sold byquality

Product value Price of FFB by qualityPrice of CPO by quality

Price of by-product by quality

Product revenueTotal revenue of FFB by

quality

Total revenue of CPO byquality

Total revenue of by-product byquality

Product costProduction cost of FFB by

quality

Production cost of CPO byquality

Production cost of by-productby quality

Product profitTotal profit from FFB by

quality

Total profit from CPO byquality

Total profit from by-product byquality

Economic wastemanagement

(EWM)Waste Capital provider

Sale, earning andcost

Sale volume Amount of waste sold by type Amount of waste sold by type

Waste value Price of waste by type Price of waste by type

Waste revenue Total revenue of waste by type Total revenue of waste by type

Waste management costCost of waste management by

typeCost of waste management by

type

Waste profit Total profit from waste by type Total profit from waste by type

Economic materialmanagement

(EMM)Material

Capital provider,supplier andcontractor

Efficiency and cost

Efficient utilization ofmaterial

Yield for estate by age group ofpalms

Oil extraction rate

Palm kernel extraction rate

Size of estates and total plantedarea

Mill throughput

Harvesting cycleMill running hours

Breakdown period

Materialcost

Total cost of materialpurchased

Total cost of materialpurchased

Economic humanresource

management(EHRM)

Human resourceCapital providerand employee

Efficiency and cost

Productivity

Labour productivity (FFBproduced per number of labour

per year)

Labour productivity (FFBprocessed per number of labour

per year)

Land labour ratio Mill capacity labour ratio

Employment cost Total employment cost Total employment cost

Economic utilityand service

management(EUSM)

Utilities and servicesCapital provider,

supplier andcontractor

Efficiency and cost

Service costTotal maintenance cost Total maintenance cost

Total service cost Total service cost

Utility cost Total utility cost Total utility cost

Economicenvironmental

impactmanagement

(EEIM)

Environmental impact

Capital provider,local community,local authority andgovernment agency

Cost Environmental costTotal environmental

management and internaliseenvironmental cost

Total environmentalmanagement and internalise

environmental cost

Economic efficiency indicators

Internal impactgenerator

Transmittingmedium

External impactreceiver

Economic issue Indicator* Metric for estate Metric for mill

Money from customer(MFC)

Money(selling to customer)

Capitalprovider and

employeeMarket share

Net volume salesVolume sale of products and

commodities based oncustomers

Volume sale of products andcommodities based on

customers

Geographicalbreakdown of market

Location and origin of majorcustomers

Location and origin of majorcustomers

Economic contributionfrom and to capital

provider(ECCP)

Money(including financial

instrument)Capital provider

Wealth creation,financial stability

and capitalinvestment

Investment fromand to capital

Provider

Borrowings, interest, insuranceand net profit

Borrowings, interest, insuranceand net profit

Investment andstrength of business

Working capital Working capital

Average capital employed inbusiness

Average capital employed inbusiness

Increase or decrease inretained earnings

Increase or decrease inretained earnings

Value of fixed and moveableassets

Value of fixed and moveableassets

Value of natural asset Value of natural asset

Efficientemployment of capital

Return on average capitalemployed (ROACE)

Return on average capitalemployed (ROACE)

Economic distribution tosupplier and contractor

(EDS)

Money(awarding contract

and providingbusiness

opportunity)

Supplier andcontractor

Fairness of outsourcing

Cost of all good,material and service

purchased

Amount paid for purchasing ofgoods, materials and services

Amount paid for purchasing ofgoods, materials and services

Contract paidNumber of contract paidinline with agreed terms

Number of contract paidinline with agreed terms

Suppliers andcontractors by origin

Number of local suppliers andcontractors awarded the

contracts

Number of local suppliers andcontractors awarded the

contracts

Name country of foreigncontractors and suppliers

Name country of foreigncontractors and suppliers

Economic equity indicators

Economic distribution toemployee

(EDE)

Money (employingof staff)

EmployeeMoney distributed

to employeesLabour cost

Money paid to employees Money paid to employees

Benefits given to employees Benefits given to employees

Economic distributionfrom and to government

agency (EDGA)

Money (taxes andother dues togovernment)

Local authorityand government

agency

Wealthdistribution

Taxes Total tax paid and tax relief Total tax paid and tax relief

Subsidies Total subsidy received Total subsidy received

Donations Donations by type and amount Donations by type and amount

ContributionContributions by type and

amount to non core businessactivities

Contributions by type andamount to non core business

activities

Capital provider,supplier and

contractor, localcommunity,

employee, localauthority andgovernment

agency

Wealth creation

Economic output Contribution to GDP Contribution to GDP

National market shareSize of production of product

in national marketSize of production of product

in national market

Economic distribution tolocal community

(EDLC)

Money (indirectmoney contributionto local community)

Local community

Distribution ofsecondary moneyflow, economic

dependency

Financial flows tolocal area

Value of local businessservicing to company's

employees, contractors andsuppliers

Value of local businessservicing to company's

employees, contractors andsuppliers

Number of employmentprovided by these local

businesses, suppliers andcontractors

Number of employmentprovided by these local

businesses, suppliers andcontractors

Economic equity indicators

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Sustainability Indicators for a businessA comparison of palm oil estates

Estate

Environmental Economic Social

Score Rank Score Rank Score Rank

A 74.14 2 77.52 2 84.62 2

B 69.83 4 69.07 4 75.81 3

C 79.73 1 77.60 1 88.95 1

D 72.90 3 72.65 3 73.37 4

Each score is a composite of around 20 metrics, each normalisedby the industry's best performance, in %.See Chee Tahir, A. and Darton, R.C. Journal of Cleaner Production 18, 1598-1607

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Charles GoodhartNorman Sosnow Professor ofBanking and Finance at theLondon School of Economics

Goodhart's Law

When a measure becomes atarget, it ceases to be a goodmeasure.

as re-stated by Professor Marilyn

Strathern

Meeting the target for one sustainability indicator, shouldnot mean that some other aspect becomes significantlyworse. This implies the need for composite targets, aswell as composite indicators.

Sustainability Indicators:a warning

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Summary

AcknowledgementsThanks to the many colleagues and students who helped to developthese ideas, especially Roland Clift, Alistair Borthwick, Roger Booth,

Colin Axon, Aidil Chee Tahir, Tom Smith.

1. Maximising resource efficiency and the traditional criteriaFitness for purpose, Economic viability, Compliance withHSE legislation are not sufficient for sustainability

2. The set of metrics should assess significant impacts oneconomic, societal and environmental capital

3. The set of metrics needs to consider, at least, efficiency ofusing or enhancing capital and fairness in distributingbenefits and disbenefits (including inter-generational)

4. The methodology for choosing metrics must be logical andtransparent