When reporting on their corporate responsibility performance, companies generally provide both absolute (e.g. total greenhouse gas emissions, total quantities of resources consumed) and relative performance data (e.g. greenhouse gas emissions per unit of turnover, energy consumed per unit of shopping floor area). However, they tend to focus their narrative on relative performance data for various reasons: these data provide a measure of operational efficiency, they can provide evidence of the effectiveness of management action and they can generally be relied on to show year-on-year improvements.
There are four reasons why stakeholders should be wary of relying on relative performance measures.
First, while expressing targets in terms of emissions per unit of turnover is intuitively attractive, emissions are not necessarily related to financial measures of performance. A simple example illustrates this point. If we take the case of two exactly similar power stations (in terms of fuel type, combustion efficiency, etc.) located in two different countries where, due to the vagaries of their respective markets, one company can charge a higher price for its electricity. In this situation, the company that charges the higher price would appear to have a lower emissions intensity than the other, even though the ecological impact of the companies is exactly the same.
Second, not all sectors have a clear correlation between greenhouse gas emissions and materials consumption. For example, in a petroleum refinery, emissions may be relatively constant and the key determinant of total emissions may be the physical properties of products being handled and produced.
Third, performance measures that are normalised by turnover would be expected to improve, even if the business had taken no substantive action to improve its emissions performance. Expressed another way, the question is whether performance improvements are simply due to increases in sales or to improvements in the operation of the business.
Fourth, and finally, there is a risk that focusing on operational efficiency has the effect of distracting attention away from absolute performance. Ultimately, progress towards a sustainable future will require that companies achieve significant reductions in their absolute levels of energy, water and resource consumption and in their greenhouse gas emissions. Improving efficiency is a necessary but not a sufficient condition towards meeting this goal.
Senior Research Fellow at the University of Leeds
Rory has recently released Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information? which delves further into ‘Responsible Investment’.