Sustainable Business

Lecture 7: Sustainability auditing for

businesses
 Aim of today
To look at a range of different approaches
related to sustainability auditing for business
 Triple Bottom Line
• Perhaps the most ubiquitous business concept
associated with sustainable strategies.
• In theory, a business should produce three
P&L statements (and Balance Sheets)
• They would look something like this:
 Financial Bottom Line
Sales revenue and other income: TR
Cost of sales (or Total Variable cost): TVC
Gross Profit: (S - C) GP
Expenses (or Total Fixed Cost): TFC
Net Profit: (GP – TFC) NP

Financial bottom line

 Social Bottom Line
Benefits to stakeholders (Social Benefit): SB
Costs borne by stakeholders (Social Costs): SC
Depreciation of social capital ΔSK

Net Social Benefit (SB – (SC + ΔSK ) NSB

Social bottom line

 Environmental Bottom Line
Benefits to environment (Environmental Benefit): EB
Costs to environment (Environmental Costs): EC
Depreciation of environmental capital ΔSK

Net Environmental Benefit (EB – (EC + ΔEK) NEB

Environmental bottom
line
 Measuring Social Costs and Benefits
Diversity
• Existence of equal opportunity policies or programmes;
• Percentage of senior executives who are women;
• Percentage of staff who are members of visible minorities;
• Percentage of staff with disabilities.
Unions / Industrial Relations
• Percentage of employees represented by independent trade union organizations
• Percentage of employees covered by collective bargaining agreements;
• Number of grievances from unionized employees.
Health and Safety
• Evidence of substantial compliance with International Labor Organization
• Guidelines for Occupational Health Management Systems;
• Number of workplace deaths per year;
• Existence of well-being programmes to encourage employees to adopt healthy lifestyles.
• Percentage of employees surveyed who agree that their workplace is safe and comfortable.
Child Labour
• Number of children working.
• Whether contractors are screened (or percentage screened) for use of child labour.
Community
• Percentage of pre-tax earnings donated to the community;
• Involvement and/or contributions to projects with value to the greater community
• Existence of a policy encouraging use of local contractors and suppliers.
 Measuring Environmental Costs and Benefits
Site specific
• Uplifting architecture
• Landscape
• Land take – biodiversity
• Hydrosphere
Product
• Cost/Benefit in use (solar collector v lawn mower)
• Packaging waste
• Product waste
• Recyclable portion
Process
• Emissions – gases and particulates
• Effluent – discharges to rivers, groundwater and water table
• Site contamination
• Input freight
Management
• Travel
• Paper waste
• Staff commuting
Market
• Distribution freight
• Costs of distributors
• Costs of suppliers
 Problems
• Aggregation problems – apples and oranges
• Need to consider entire value chain
• Problem of double counting – should we add
incomes of employees?
• Most are costs – net social and environmental costs
• Where are the benefits?
• Better to regard as externalities and internalise them
to produce “sustainable profit”
• Techniques of valuation and aggregation framework
 “People, Profit, Planet”
(see http://www.peopleprofitplanet.co.uk/index.php/about/)
• The difficulties with TBL have lead to its use as a framework
• KPIs allied to each of the bottom lines
• The framework has been popularised as People, Profit, Planet and is a
useful conceptual framework
 What are we trying to measure?
• Social impact of operation
• Environmental impact of operation
• Hugely complex set of operational causes and
environmental and social/cultural effects that need
to be identified and evaluated.
• Environmental and social auditing is at a very early
stage of development compared with financial
reporting and auditing – but standards have been
developed to attempt to address.
 Life Cycle Analysis (LCA)
Environmental impact: need to consider all
stages in the supply chain

This approach is a useful general framework for analysing

business operations under any auditing system discussed in this
lecture
What techniques have we already discussed?

• Optimum level of pollution (narrow and ongoing)

• CBA (fundamental and challenging)

• Triple bottom line – problems of evaluation and

quantification
 What other techniques are available?
Environmental management systems

“An EMS is a systematic approach to managing your organisation’s

impacts on the environment. Having and following an EMS is
voluntary, but organisations with an EMS have an explicit
commitment to continual environmental improvement” (WRAP
2013, P.2)

A good overview and source of information about environmental

management systems can be seen in Wrap (2013). Your guide to
environmental management systems

(Available at: http://

www.wrap.org.uk/content/your-guide-environmental-management
-systems-ems
)
 ISO 14001 - The International Standard for
Environmental Management

This standard is applicable to any organization that wishes to:

• implement, maintain and improve an environmental
management system;
• assure itself of its conformance with its own stated
environmental policy (those policy commitments of course
must be made);
• demonstrate conformance;
• ensure compliance with environmental laws and regulations;
• seek certification of its environmental management system
by an external third party organization;
• make a self-determination of conformance
 The Eco-Management and Audit Scheme (EMAS)
• EMAS is compatible with the international standard for environmental
management systems, ISO 14001, but is perceived to go further in its requirements
for performance improvement, employee involvement, legal compliance and
communication with stakeholders.

• To receive EMAS registration an organisation must:

• Conduct an environmental review considering all environmental aspects of the
organisation’s activities, products and services; methods to assess these; its legal
and regulatory framework and existing environmental management practices and
procedures.
• Establish responsibilities within the EMS; set objectives; provide the resources to
support the EMS; implement operational procedures appropriate to the objectives;
identify training needs and implement monitoring and communications systems.
• Carry out an environmental audit, assessing in particular the management system
and conformity with the organisation’s policy and programme as well as
compliance with relevant environmental regulatory requirements.
• Publish a statement of its environmental performance that lays down the results
achieved against the environmental objectives and future steps to be taken to
continuously improve the organisation’s environmental performance.
 Key Environmental Management systems used
by industry (ISO 14000/1)

• The systems help evidence environmental

credentials;
• More and more firms are taking it up;
• We will be looking at this next week.
 What other techniques are available? Social
auditing
Social auditing – initially applied to social enterprises but
expanding to all businesses. Conventional concerns of CSR are
included: equal opportunities, employee welfare etc. The social
audit should consider the impact of the business on:

Individuals

Consider the effect on people as individuals, employees, volunteers,

beneficiaries and others who come into contact with the organisation.
Well-being?

The community and its social capital

Social capital is about relationships, neighbourliness, social networks,

support and civic engagement.
Subjective measures: local attitudes
More objective measures: local organisations and partnerships
 Emerging ISO standards for social
responsibility
• See
http://www.slideshare.net/StaffanS/iso-26000-social-
responsbility-status-dec-2012
(see slide 26 and 29 amongst others)
 What other techniques are available?
Environmental Risk Assessment
• There may be many areas in a business that could pose an
environmental hazard. However, there are some areas to pay
particular attention to, including:
• waste storage and disposal - for example making sure that
proper containers are used, and are located away from drains
and watercourses
• emission of dust and other substances to the air
• storage, use and disposal of hazardous substances
• drainage and disposal of liquid waste
• environmental impact of your raw materials, such as
potentially toxic metals or other materials
• environmental impact of packaging
• There are statutory minimum standards to maintain in some
of these areas
 Examples
• Summary guidelines for environmental risk management
produced by government.
https://
www.gov.uk/government/publications/guidelines-for-environmen
tal-risk-assessment-and-management-green-leaves-iii

• See more detailed risk assessments in relation to chemicals

and industry or chemicals and government policy at: Risk
policy analysts - http://www.rpaltd.co.uk/our-work.shtml

(these reports are very accessible and readable)

 What other techniques are available?

The compliance approach

• Complying with environmental regulations – such as:
• Emissions and discharges - oil storage, water pollution, trade effluent - discharges
to sewers, air pollution from furnaces, boilers and bonfires, contaminated land,
vehicle use and emissions, sustainable drainage
• Waste - reduce, reuse and recycling business waste, waste carriers, brokers and
dealers, duty of care - waste responsibilities, hazardous / special waste, import and
export of waste, packaging, waste electrical and electronic equipment (weee),
animal by-products, landfill, waste incineration.
• Hazardous substances - pesticides and biocides, solvent emissions, ozone depleting
substances, radioactive substances and wastes, REACH regulation – manufacturing,
using, selling and importing chemicals, restriction of hazardous substances in
electrical and electronic equipment (ROHS), control of major accident hazards
(COMAH)
• Nuisances - noise, odour
• Wildlife and the environment - Japanese knotweed, giant hogweed and other
invasive weeds, nature conservation
• Resource efficiency - energy labelling
• http://www.netregs.gov.uk/netregs/default.aspx
 Examples: REACH - industry
relevant regulation
• Registration, Evaluation, Authorisation & restriction of
Chemicals (REACH) -
http://www.hse.gov.uk/chemicals/defrasummary.pdf
 Limitations of the compliance approach
• Purely reactive – adjustments in operations may
need to be made at short notice as regulations
change.
• Disruptive and expensive
• Tends to obscure opportunities for innovation and
cost saving associated with the underlying insights
and initiatives
• Piecemeal and incremental
• Tends to limit possibilities of enhancing corporate
image
• Better to keep ahead of regulations
 What other techniques are available?
Key Performance Indicators (KPIs)
• The Defra KPIs can be grouped into categories, as follows:
• resource use - water, gas, oil, metals, coal, minerals,
aggregates, forestry, agriculture
• emissions to land - waste, pesticides and fertilisers, metal,
acids and organic pollutants, radioactive waste
• emissions to air - dust and particles, greenhouse gases, acid
rain, ozone-depleting substances, metal emissions, volatile
organic compounds
• emissions to water - nutrients and organic pollutants, metal
• May also need to consider KPIs for two other areas:
• The impacts of the supply chain
• Products after they have left the business
• The KPIs for these will vary depending on the nature of the
business.
 What other techniques are available?

• Environmental impact assessment (EIA)

• Developments that are likely to have a significant
effect on the environment (these are generally, but
not exclusively, large-scale developments) will not be
approved until an EIA has been carried out.
• This is simply a description and quantification of
physical impacts.
• No evaluation in money terms.
Relevant government websites for
more information on EIA
http
://www.scotland.gov.uk/Topics/Built-Environment/plan
ning/National-Planning-Policy/themes/enviro-assessme
nt/eia

https
://www.gov.uk/assessing-environmental-impact-guidan
ce
 How effective are these techniques?
• Most yield a mass of physical measures of impacts and
resources used without any basis for comparative of absolute
assessment of sustainability
• Sometimes difficult to judge whether performance is good or
unacceptable
• It can be possible to develop sector standards/targets based
on physical measures
• Better to evolve performance ratios – e.g. carbon emitted per
£ revenue; gha per £ revenue
Integrated reporting
“By describing, and measuring where it is
practicable, the material components of value
creation and, importantly, the relationships
between them, <IR> results in a broader
explanation of performance and outcomes than
traditional reporting. In particular, it makes
visible all the relevant capitals on which value
creation (past, present and future) depends,
how the organization uses those capitals, and
its effects on them.”
 Integrated reporting

“Metrics, such as KPIs … and in some cases

monetization, are very important in explaining an
organization’s uses of and effects on various capitals.
Nonetheless, the Framework does not require, and it
would not be practicable to expect, organizations to
attempt to quantify all movements in all capitals. Many
uses of and effects on the capitals are best (and in
some cases can only be) reported on in the form of
narrative rather than through metrics.”
Further information on Integrated
reporting
See the Chartered Institute of Management Accountants:

http://www.cimaglobal.com/Thought-leadership/Integrated-
reporting/
 Summary
• There are a range of techniques
available for sustainability auditing.
They have somewhat different
purposes; are at different stages of
development;

• Sustainability auditing is becoming

increasingly important to businesses

• The area is fast evolving, research

and development is ongoing.
Further core reading/sites to look
at
Wrap (2013). Your guide to environmental management systems.
See: http://
www.wrap.org.uk/content/your-guide-environmental-management-sys
tems-ems
See the Chartered Institute of Management Accountants on integrated
reporting. See: http
://www.cimaglobal.com/Thought-leadership/Integrated-reporting/

For a summary of risk assessment by UK government see:

https://www.gov.uk/assessing-environmental-impact-guidance