New Bottom Line Volume 13.1 – Key Sustainability KPIs: the simple, the sobering, the significant

Friday, April 30, 2004

“What gets measured, gets managed,” as the saying goes. That’s true of the sustainability journey too. The worldwide interest in sustainability has brought with it a growing and welcome interest in sustainability indicators — but what to measure is far from obvious, as the dizzying array of publications, conferences, reports, tools and systems will attest. How do you find the KEY performance indicators (KPIs) that provide critical leverage amidst the noise.

Some companies still give the subject short shrift. Several thousand companies produce corporate environmental reports (but all too often these are focused as stakeholder communication that miss their potential contribution as management tools). A few have invested substantial efforts in developing meaningful performance indicators, and supporting systems, that can help internal as well as external stakeholders track environmental performance.

The World Business Council on Sustainable Development, the Global Reporting Initiative, and others NGOs have tried to develop shared frameworks and common reporting approaches. But comprehensive frameworks run the risk of being overwhelming (an even more common problem with community sustainability indicators projects, which face a near infinite range of constituency concerns without the mind-focusing anchor of the profit principle).

Drawing from our years of intensive work on sustainability indicators — through analysis (EcoMetrics), workshops (EcoIndicators and The Measures That Matter), KPI software (Business Metabolics), and development of corporate environmental reports (see “Notes,” below), we find that three key indicators consistently rise to the top of the list: Return on Resources; Product to Non-Product ratio; and the carbon footprint. There’s a large universe of indicators possible, but these three — one simple, one sobering, one significant — provide critical leverage for driving behavior toward improved environmental and economic performance.

1. Return on resources (ROR) — the ratio of profit, revenue or intended result to energy, water, toxics or other critical resource inputs. This indicator directly links economic and environmental performance: How much money are we making (or how much product are we shipping) per unit of critical resources used, or unit of environmental burden generated?

Examples include profit per kilowatt-hour, revenue per ton of raw material, units of product per pound of hazardous “waste.” Which ratios should you choose? That will vary with your industry and company, and perhaps with your role in the company. Ideally, KPI users should be able to explore different ratio sets, to see which disclose meaningful patterns for their particular needs; they could even include return on “non-product” — such as profit per pound of solid “waste.” The test: does the ratio provide insight, and help drive better decisions that drive better performance?

(We favor putting the intended result in the numerator so that resulting ratio has the same “up is good” directionality of most financial indicators like revenue, profit, and market share, rather than the “down is good” vector of most environmental indicators.)

2. Product to Non-Product Ratio (P2NP). This ratio can be seen as a special case of ROR — the ratio of productive output to what Bruce Cranford of US DOE labeled “non-product output” (NPO) — all the stuff that companies produce but don’t sell, and ship out instead to smokestacks and sewer lines and “waste” dumps.

Comparing the proportion of output identified as “product” (or “intended result”) vs “non-product” (or “unintended result”) is most usefully conveyed as the ratio of product to total output (P / (P+NPO)). The result is always sobering, and often staggering. The ratio for the US economy as a whole is 6% product, 94% ‘non-product’ according to Robert U. Ayres, National Academy of Engineering.

The ratio varies by industry and by company, of course, but it my experience is always far worse than companies estimate. And confronting the stark reality of this ratio is one of the most powerful change drivers I’ve seen, since it becomes obvious to environmental managers and financial managers alike that producing NPO makes no business sense at all. (In fact, we’ve seen this single metric convince companies to adopt “zero waste” policies.)

3. Carbon Footprint (CF): the GreenHouse Gasses (GHG) — commonly expressed in CO2 equivalents — generated from a company’s activities. This measure ties to global warming impacts and Kyoto Treaty targets, and has tradable economic value; more importantly, it will drive deep process and strategy innovation that can have significant impact on profit and future market share.

It’s easiest to determine this from your company’s direct activities (eg, plant, equipment, fleet), and that’s a good place to start, since the data is readily at hand. Indirect GHG impacts (e.g. upstream suppliers, products in use in the world, disposal/recycling), however, may have a significantly larger footprint — an order of magnitude larger, in some companies we’ve studied; understanding this has been a powerful driver of Design for Environment (DFE) product efficiency improvements in companies as varied as Hewlett Packard and Electrolux.

There’s a difference, of course, between eco-efficiency indicators and sustainability indicators. ROR and P2NP are more of the former; CF begins to touch the latter. I’ll have more to say about sustainability indicators (and the Ecological Footprint) in a future column.

But I’ll close with a hint: My first choice for a “leading” sustainability indicator (the analog to the leading economic indicators that “change before the economy has changed”) would be Carbon Productivity (CP) — the ratio of your intended results to tons of CO2 equivalents generated.

For more information:
Analysis (http://www.natlogic.com/resources/publications/)
The Measures That Matter™ workshops and advisory services (http://www.natlogic.com/services/feedback/)
Business Metabolics™ KPI software (http://www.businessmetabolics.com/)
Corporate environmental reporting

(c) 2004 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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