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August 03, 2006
ADVANCE Converts Corporate Environmental Metrics Into Monetary Terms
    by Bill Baue

The transparent methodology stands to advance corporate social responsibility and socially responsible investing, but it remains to be seen if it measures true sustainability.

One factor limiting companies and investors from more fully embracing sustainability is the difference in metrics used to measure social and environmental impacts and those used to measure business success. The introduction of the ADVANCE system in April 2006 takes first steps toward reconciling this difference by expressing "Sustainable Value" in monetary terms that investors and corporate executives understand, such as opportunity costs and gross value added. ADVANCE is a joint project of the Sustainable Development Research Center (SDRC) at St. Andrews University in Scotland, the Institute for Futures Studies and Technology Assessment (IZT) in Berlin, and four sustainability research firms, including Milan-based Avanzi.

The new methodology is a promising development in terms of encouraging the corporate and investment communities to measure financial strength not in a vacuum, but rather in relation to real environmental impacts. The method shows even more promise in measuring Sustainable Value not just in comparison between companies, but by the yardstick of existing regulatory goals such as carbon emissions reduction targets. Of course the degree to which any of this brings the world closer to true sustainability is dependent on whether the regulatory goals are stringent enough to positively impact the environment, or are just lines drawn in the sand.

The inaugural study demonstrating the methodology of ADVANCE (which wins the most thankful acronym award for shortening "Application for the Dissemination of Value-Based Eco-Ratings in Financial Markets") examines 65 European companies from 2001 through 2003. It looks at how these companies from the so-called EU15 (the original 15 countries comprising the EU before the annexation of 10 others) use seven environmental resources. These resources include emissions of carbon dioxide (CO2), nitrogen oxide (NOx), Sulphur Oxide (SOx), volatile organic compounds (VOCs), and Methane (CH4), as well as waste generation and water use.

ADVANCE correlates this resource use to gross value added, or a company's contribution (before depreciation) to Gross Domestic Product (GDP). This allows the researchers to compare sustainability performance expressed in monetary terms between companies, or to the benchmark of the aggregate EU15 economies.

"A company only creates value with an environmental resource, such as water, if it generates more return with that resource than other companies," explains Frank Figge of SDRC.

For comparative purposes, this is a significant step forward, as it challenges companies to use resources more efficiently.

"In the years 2001 to 2003, 29 of the 65 companies created a positive Sustainable Value [by using] their resources more efficiently than the EU15 benchmark," states the study. "The spread between the leaders and laggards is considerable: While DaimlerChrysler created a positive Sustainable Value of 29.9 billion € in 2003, Shell had a negative Sustainable Value of -180.9 billion €."

When ranking companies, ADVANCE takes company size into account. This had the effect of lowering DaimlerChrysler (ticker: DCX) from the highest position in pure Sustainable Value to seventh place in relative terms, and raising Shell (RD) from the lowest rung to 49th of 65. It is important to note that a positive Sustainable Value or a high ranking compared to other companies, while laudable, does not necessarily mean that the company's impact on the environment is actually "sustainable" in an ecological sense.

To move closer to such a measurement, ADVANCE shifts from assessing past performance to projecting future performance against specific EU15 policy targets for economic growth as well as environmental emissions and impacts reductions by 2010. According to ADVANCE, 25 of the companies have a positive Sustainable Value--meaning that they create economic value while operating within environmental constraints. Again, it remains to be seen whether these targets actually help achieve a truly sustainable planetary ecosphere.

In addition to the limitations of politically prescribed environmental performance targets, ADVANCE identifies other limitations preventing the methodology from reaching its full potential.

"The number of European manufacturing companies that publish reliable environmental figures is alarmingly low," says Prof. Figge. "Corporate environmental reporting needs to improve dramatically."

Counterbalancing these limitations are clear benefits, especially for the socially responsible investing (SRI) community.

"Socially responsible investors and analysts can use the Sustainable Value methodology to identify out- and under-performers," states the study, highlighting the fact that the methodology is transparent and therefore usable by all. "The future performance scenario is particularly interesting in the context of risk analyses: SRI-investors can determine which companies are most vulnerable to tightened regulation in different environmental areas."


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