A model for integrated assessment of sustainable development

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Abstract

The focus of the paper is on consideration of how to use indicators to monitor sustainable development in a relevant and useful manner. Integrated information on sustainable development of a company is very essential for decision-making since it is very difficult to evaluate the performance of the company on the ground of too many indicators. The objective of the work was to design a model for obtaining a composite sustainable development index (ICSD) in order to track integrated information on economic, environmental, and social performance of the company with time. Normalized indicators were associated into three sustainability sub-indices and finally composed into an overall indicator of a company performance. This was applied by determining the impact of individual indicator to the overall sustainability of a company using the concept of analytic hierarchy process.

The demonstration of the model used data for a case study company, Henkel, and a set of sustainable development indicators that were classified using the currently most widely accepted approach of the Global Reporting Initiative (GRI). Case study was used to measure ICSD and sustainability sub-indices of the company over the time interval of 6 years. Interpretation of results is given and the utility of ICSD with its relevance for decision-making is pointed out. Using a case study, the paper demonstrates that the model can be applied to deliver composite indicators of sustainability performance of companies.

Introduction

Sustainable development (SD) is the concept that plays important role in business and industry of the 21st century. Industry sector is responsible for appreciable material flows within human society as well as the exchange of material and energy with the environment. The impact of industry can be determined in the “triple bottom line”, covering the three aspects of sustainability, which are environmental performance, social responsibility and economic contribution. The companies are already involved in various activities aimed at addressing sustainable development, which has been defined as the creation of goods and services using processes and systems that are non-polluting, conserving energy and natural resources, economically viable, safe and healthful for employees, communities and consumers, socially and creatively rewarding for all working people (Veleva and Ellenbecker, 2001). The achievement of such ambitious objectives requires a radical re-think of many of practices in industry and different approaches are needed to evaluate efforts to move towards SD.

Until now, many companies have been using only standard financial indicators to track their business effectiveness. Nowadays, due to demands from various parties (such as customers, suppliers, employees, national regulators, banks, insurance companies, shareholders, trade associations, local community), sustainability reports are emerging as a new trend in corporate reporting, integrating into one report the elements of financial, environmental, and social facets of the company (GRI, 2002).

Sustainability reports usually introduce a set of SD indicators that can be used to measure sustainability performance of a company. They translate sustainability issues into (usually) quantifiable measures of economic, environmental, and social performance with the ultimate aim of helping address the key sustainability concerns (Azapagic, 2004) and to provide information on how the company contributes to sustainable development (Azapagic and Perdan, 2000).

A definite need has been identified to develop a comprehensive framework of sustainability criteria that focus on the performance of the industry sector and more specifically the sustainability assessment of companies. Dozens of indicators have been suggested for use in determining improvements made to chemical process, a manufacturing site, or a manufacturing enterprise (Sikdar, 2003). Important developments for the issue of sustainability reporting were the foundation of the World Business Council for Sustainable Development (WBCSD, 1997), the foundation of the Global Reporting Initiative (GRI, 2002) and the development of standards for environmental management systems, such as the ISO 14000 and EMAS standards (OECD, 2001). One of significant studies on sustainability metrics was sponsored by the Center for Waste Reduction Technologies (CWRT) of AIChE (2004) for evaluating process alternatives. The other significant effort was made under the auspices of the IChemE (2002) in the U.K. In this effort, the indicators are specifically grouped into environmental, economic and social categories. Veleva and Ellenbecker (2001) discussed the indicators of sustainable production, including their dimensions and desirable qualities. The authors suggested a methodology of core and supplemental indicators for measuring progress of companies towards sustainable development systems. Krajnc and Glavič (2003) collected and developed a standardized set of sustainability indicators for companies covering all main aspects of SD. To enable comparisons among companies, they used ISO 31 (1993) as a guide to terms used in names and symbols for (physical) quantities. Azapagic (2004) developed a framework for sustainability indicators for performance assessment of mining and minerals industry, which comprises economic, environmental, and social indicators being compatible with the general indicators proposed by GRI.

However, in all these indicator frameworks no attempt was made to create aggregate measure for easy comparison, for instance, for assessing the development of the companies using one composite index to give both simplified and quantified information on their sustainability performance. In recent years, international research has focused on the development of composite indicators mostly for cross-national comparisons of economic, social, environmental and/or sustainable progress of nations in a quantitative fashion. Such indicators have been applied in a wide variety of application fields such as:

  • Environment: pilot environmental performance index (WEF, 2002), index of environmental friendliness (Statistics Finland, 2003), eco-indicator 99 (Pré Consultants, 2001);

  • Economy: internal market index (JRC, 2002), composite leading indicators (OECD, 2002), index of sustainable and economic welfare (Daly and Cobb, 1989);

  • Society: human development index (UNDP, 1990–2003), overall health system attainment (Murray et al., 2001); and

  • Sustainability: Dow Jones sustainability index (DJSI, 2003), index of balanced sustainable development (Seljak, 2001).

Despite the indices developed, there is still no useful method for integrated sustainability assessment on the company level available. To meet the challenges of sustainability, an approach for integrated assessment of companies is required to provide a good guidance for decision-making. It has been foreseeable that aggregation of indicators to sustainability indices could provide a chance for new policy guiding instruments and better integration of decision-making, as well as public participation in sustainability discussion. Although the common principle to aggregate indicators for assessment of the company has gained acceptance, it has also become evident that methods for the aggregation of indicators are either not sufficiently well established yet, or are under development, or are not available with respect to all the sustainability aspects. As the credibility of aggregation methodologies is of crucial importance for the quality of new information categories, more research is needed on the aggregation methodologies and on the relevance of basic data for comprehensive assessments (Statistics Finland, 2003).

This paper presents a designing of a composite sustainable development index (ICSD) that would assess performance of companies as a function of time. The focus of the paper is a consideration how to integrate indicators in order to determine SD in a relevant and useful manner for decision-making. It concentrates on business sustainability and it tends to move from trying to define SD towards developing a concrete model for promoting and measuring sustainability achievements of the company. The paper organizes sustainability assessment of the company in terms of economic, environmental, and social performance. This structure has been chosen because it reflects what is currently the most widely accepted approach to defining sustainability (GRI, 2002). The main aim is to raise the quality of sustainability reporting to a higher level of consistency. The paper discusses how economic, environmental, and social indicators can be associated into sustainability sub-indices and finally into an overall indicator of a company performance. This is applied by determining the impact of individual indicator to overall sustainability of the company using the concept of analytic hierarchy process (AHP) (Saaty, 1980). The model uses normalized social, environmental, and economic indicators to incorporate them into a unique measure of performance. The model could provide a point of reference against which reporting companies and report users approached the challenge of developing more effective and useful reporting practices.

Section snippets

A model for integration of sustainable development indicators into composite index

Integrated information on sustainable development of a company is very essential for decision-making since it is very difficult to evaluate the performance of the company on the ground of too many indicators. The proposed model reduces the number of indicators by aggregating them into a composite sustainable development index (ICSD). The basic hierarchy of composing indicators into the ICSD is shown in Fig. 1. ISO 31 was used as a guide to terms used in names and symbols for (physical)

Case study

The effectiveness of the proposed model has been tested in a case study. The data needed have been obtained from an annual sustainability report of Henkel, internationally operating company with a widely diversified product portfolio (Henkel, 2003). Its business activities are divided into the five product divisions: adhesives, chemicals products, laundry/home care, cosmetics and toiletries, industrial and institutional hygiene, and surface technologies.

The case company is positioned among the

Conclusions

The results of the model proposed here show it to be feasible and could be easily applied at the company level. While no measure of such a complex phenomenon can be perfect, the ICSD could be a useful measure of the current sustainability performance of the case company.

While sustainability information is typically treated separately, this paper tries to translate it into a form that corresponds to the needs of decision-makers. The paper illustrates that it is possible to assess the sustainable

Acknowledgements

The authors would like to acknowledge financial support from the Ministry of Education, Science and Sport of Slovenia, Research Grant No. 3311-02-831226.

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