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Statistical Method and Neural Network for Sustainability Evaluation

Conference Paper · September 2014

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 Statistical Method and Neural Network for
Sustainability Evaluation

Edward Kasem1, Oldřich Trenz2, Jiřı́ Hřebı́ček3

Abstract. A sustainability report is an organizational report that conveys
the information about economic, environmental, social and governance indica-
tors in a way that is comparable with financial reporting. There are different
methods for measuring corporate performance and assessing their sustainabil-
ity.
In this paper, two methods of environmental, social, governance and economic
indicators assessment are described. The first one is Kren method, which im-
poses that all indicators and dimensions effect similarly on assessing the enter-
prises performance. Whereas the second one supposes that different indicators
and dimensions don’t effect equally on enterprises score. The main objective
of these methods is improving the benchmark between the enterprises and pro-
viding an active participation in decision-making.
The article will also outline ways of using neural networks for the classification
of their financial situation. It is a relatively simple way based on historical
data to assess the financial situation in which the business is located. At the
end will be an assessment of the different approaches with regard to simplicity
of implementation and accuracy of the conclusions reached.
Keywords: performance indicators, statistical analysis, sustainability, neural
network.
JEL classification: C44
AMS classification: 90C15

1 Introduction

Sustainability reporting is a mainstream business activity that demonstrates the link between the orga-
nization strategy and commitment to a sustainable global economy. It engages companies in disclosure
of their overall economic, environmental, social, and governance (ESG) impacts and efforts [15]. This
engagement summarized by helping the organizations in understanding, measuring and communicating
their main four performance pillars (economic, environmental, social and governance). At the current
time, primarily, the large companies only who got involved in sustainability reporting practices. Small
and medium sized enterprises (SMEs), despite of their significant impacts on Europe economy, employ-
ment and environment, show low level of engagement. Because of the important effects of SMEs that
impact on the Europe economy, small and medium enterprises need a method or procedure to measure,
control and improve their performance. Such a procedure for effective and efficient management should
be simple, efficient and integrate these various viewpoints of the performance in environmental, economic
and social terms [8].
Many frameworks are used for measuring corporate performance and sustainability. Recently, the
most widely used framework for sustainability reporting is Global Reporting Initiatives (GRI)[4, 5]. In
additional, there are many international standards for implementing and certifying the sustainability
pillars like ISO 9000, ISO 14000, ISO 18000[12], ISO 26000[11] and EMAS[2]. There are also many
1 Mendel University in Brno,Faculty of Business and Economics, Department of Informatics, Zemědělská 1, Brno, Czech

Republic, edward.kasem@mendelu.cz
2 Mendel University in Brno,Faculty of Business and Economics, Department of Informatics, Zemědělská 1, Brno, Czech

Republic, oldrich.trenz@mendelu.cz
3 Mendel University in Brno,Faculty of Business and Economics, Department of Informatics, Zemědělská 1, Brno, Czech

Republic, jiri.hrebicek@mendelu.cz
other popular specialized sustainability reporting frameworks like Sustainability Assessment of Food and
Agriculture (SAFA), which reports in Food and Agriculture systems and described in [25].
The main goals of this paper can be summarized in two points. Firstly, two common methods which
are used in sustainability assessment in Czech Republic, are described. In the first one “Kren method”
[21], all the indicators effect similarly on assessing the enterprises performance. Whereas in the second one
“Statistical method” [15], each indicator effects differently on enterprises score. Secondly, new method
for sustainability assessment using neural networks is proposed.

Environmental indicators
Water and Air Nitrogen balance
Phosphorus balance
Potassium balance
Used Resources
Balance of organic materials
Energy consumption
Intensity of plant protection
Biodiversity Soil erosion
Potential biodiversity
Economy indicators
Enterprises sales
stability Profit
Indebtedness
Contribution to payment
liquidity
liquidity
Rentability Rentability
Social indicators
Remuneration
Working hours
Holidays
Labor and Employment
Education
Health and safety
Employee Engagement
Participation in society indicators rate:
1-Social engagement
Social engagement
2-Public Relations
3-Involvement in the region

Table 1 ESG indicators for manufacturing enterprises

The paper is structured as follow. Two previous mentioned methods are described in Section 2.
The steps followed in each method to achieve overall enterprise sustainability are presented. Section 3
introduces the proposed neural method for sustainability assessment. Finally, Section 4 concludes the
paper.

2 Methods for sustainability reporting

In this section, two method used for sustainability reporting in Czech Republic, are described.

2.1 Kren method

One of the methods used for sustainability performance assessing in agriculture farms is Křen method
[21]. This method is proposed for assessing individual corporate performance indicators using the range
of [0, 1] where 0 represents undesirable value of the sustainability, whereas 1 represents the best value.
These sets of indicators are presented in Table 1[21]. In this method, the assessment is done according to
the proposed functions which determine the appropriate level of corporate sustainability of agriculture
farm. After assessing the indicators and calculate their rate (score), the index of each sustainability
dimension (economic, environmental, social and governance) should be calculated. These calculations
are done by aggregating the rates (scores) of individual indicators, which belong to the same dimension.
Then the average should be computed. The sustainability threshold for each dimension should be more
than 0.75. The overall index is expressed as an average of the three dimensions’ indexes according to the
equation (1).
Ie + Ia + Is
Ic = (1)
3
where Ic is the overall sustainability index for environmental, social and economic dimension. Ie is the
sustainability index of economic dimension. Ia is the sustainability index of environmental dimension. Is
is the sustainability index of social dimension.
Křen method illustration of the overall sustainability performance of agriculture organization (farm,
company, enterprise) is shown in Figure 1[21]. The visualization of the Křen sustainability performance

Figure 1 The result of enterprise sustainability assessment.

rating is depicted in the polygon of a hypothetical organization. It shows us the indicators which meet
the sustainability criteria and which should be improved to achieve the completeness and balance of
the agricultural system. It also gives us a clear graphical representation about the weak points in the
management of the whole agricultural enterprise or its individual parts and the issues that should be
included as a solution. The thick blue line connects between the indicator rates for studied enterprise.
Whereas, the red one describes the boundaries of good overall sustainability.

2.2 Statistical method

The statistical method is the newest method used for sustainability assessment [15]. These methods
use ESG indicators which have been developed last few years [15, 8, 1, 9] by choosing the most suitable
indicator from GRI and SAFA frameworks. The sets of indicators proposed for manufacturing enterprises
is listed in the tables of [15, 16, 17, 18]. These indicators can be used for wide range of SMEs on the food
and agriculture sector [8, 3, 10].
In this method, the sustainability indicators should be showed to the respondents of studied compa-
nies.The responses should be collected depending on Likert-type scale which is mentioned in four points:
1 = not important, 2 = somewhat important, 3 = important, 4 = very important and additional one 5
= do not know. After that, several statistical analysis should be applied on the all achieved responses.
Depending on the statistical analysis, the weight of each indicator can be determined. This can be done
by applying Principal Components Analysis [13] with VARIMAX rotation using SPSS program [23]. The
goal of this analysis is removing those indicators that bring similar information to the solution from the
monitored set. Also the correlation analysis has played a great role in evaluating the indicators. The
correlation coefficient value, which could be calculated for any pair of variables, lies in the range of [-1,
+ 1] and testifies among other things, to the strength of linear relationship between the two variables.
Rotated Component Matrix can be also calculated and used for explaining the relationship between the
indicators and their groups. Cronbach’s Alpha should be extracted for each indicator group (factor).
Finally, the overall sustainability index for ESG and economic dimension can been calculated according
to the equation (2)

IU P V = SwEN V I SIEN V I + SwSOC SISOC + SwCG SICG + SwEKO SIEKO (2)

where IU P V is the overall system’s score. SIEN V I , SwEN V I are the sustainability index and weight of
environmental dimension, respectively. SISOC , SwSOC are the sustainability index and weight of social
dimension, respectively. SICG , SwCG are the sustainability index and weight of governance dimension,
respectively. SIEKO , SwEKO are the sustainability index and weight of economic dimension, respectively.
The sustainability index for each group of environment, social, governance and economic performance
are expressed in the following equations (3).

SIN ind = SubindexN ind1 + SubindexN ind2 + ... + SubindexN indn (3)

where the index of each indicator is computed using the equation (4).

Subindexindn = Lw.rind (4)

where Subindex is the index of the corresponding indicator. Lw is the weight of the indicator. rind is the
score of the indicator. N ind is indicator for the dimension (environment, social, governance or economy).

3 The proposed neural networks for sustainability assessment

Artificial neural networks can be implemented in the field of automated evaluation of a company’s financial
situation; i.e., in identifying the company’s actual condition (e.g., under-capitalized, over-capitalized, non-
descript situation),[20]. Upon identifying the company’s condition (its financial indicators), an expert or
perhaps an expert system can formulate incentives leading to a considerable limitation of entrepreneurial
risks, and in the long run, can contribute to the company’s stability[6]. Identifying the company’s situa-
tion is a fairly weighty problem in the case of smaller companies, especially when the company does not
employ a financial expert[27].
The possibility of evaluating a large number of descriptive indicators (in this case: financial indica-
tors), which are apposite concerning the situation of the object-company[7], is one of the advantages of
neural networks. In contrast with evaluations performed by people-experts, we do not have to accede
to a reduction of this descriptive data (their large number, the temporal difficulty of the evaluation);
with regard to this situation, we are able to achieve, in the case of unambiguously identifiable cases
(under-capitalized or over-capitalized state), a considerably high speed and accuracy. With nondescript
conditions, it is necessary to call for subsequent expert assessment[26].
Prior to the classification itself, it is necessary to teach the neural network1 . Here, however, we
must distinguish whether the teaching data are available - including a division of the companies into
classification groups (the method of teaching with the teacher) - or not (teaching without the teacher),[22].
This situation influences the selection of the suitable neural network type and of the teaching algorithm.
In the first case, if the company’s history data, including their differentiation, are readily available, we
can employ the multi-layer neural network and the Back Propagation Errors teaching algorithm[24]; in
the opposite case, we can use self-organizing neural networks and Kohonen’s teaching[19]. The situation
resolved by means of this type of network (a self-organizing network) is displayed on Figure 2 for the option
of a smaller and greater number of classified companies. We are speaking of agricultural companies coming
1 The supposition is that we can employ data from the neural network teaching area; subsequently we make use of the

principle of the universal neural-network generalization.

 Figure 2 The result of enterprise sustainability assessment.

from Czech Republic’s manufacturing industry. Financial indicators subsequently used for determining
the companies’ liquidity, profitability, indebtedness and activity[26] have been used - in individually
examined samples - for the division into groups. Upon determining the semantics of individual groups
(by an expert) we can use this data also for establishing the multi-layer neural network’s teaching. In
this case, we are dealing with a multi-layer classification[14]. In both cases, the emphasis is placed on
simplifying and accelerating the resulting classification, as a part of the company’s expert evaluation.

4 Conclusion

The main components of sustainability assessment are indicators. These indicators have influenced the
company strategy and show how the company approaches a comprehensive performance evaluation, the
management, the corporate reporting, sustainability, etc. Sustainability Reporting (SR) is a voluntary
organization’s activity with two general purposes: to assess the current state of an organization’s eco-
nomic, environmental and social dimensions, and communicate an organization’s efforts and sustainability
progress to their stakeholders. This assessment helps the organization with benchmarking against other
organizations and demonstrating its weak points and the way of improving them.
The use of neural networks has been demonstrated on the issue of classifying a company’s financial
situation. The resulting implementation of this approach can be modified, depending on the nature of
the task (the indicators of the company’s financial situation, descriptive indicators). In both cases, it
is mandatory to have access to historical descriptive data which are necessary for teaching the selected
neural network type. In connection with an expert system, we can subsequently create recommendations
influencing the further shaping of the given company’s financial policies.

Acknowledgements

This paper is supported by the Czech Science Foundation. Name of the Projects: Construction of Methods
for Multi-factor Assessment of Company Complex Performance in Selected Sectors. [Nr. P403/11/2085]
and Measuring corporate sustainability performance in selected sectors [Nr. 14-23079S].

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