Developing A

Business Strategy and the Environment
Bus. Strat. Env. 15, 347–360 (2006)

Published online 20 July 2006 in Wiley InterScience
(www.interscience.wiley.com) DOI: 10.1002/bse.542
Developing a Sustainability
Accounting Framework to Inform
Strategic Business Decisions: a Case
Study from the Chemicals Industry
James R. D. Taplin*, David Bent and David Aeron-Thomas
Sustainable Accounting Programme, Forum for the Future, London, UK
ABSTRACT
Forum for the Future worked in partnership with a division of a blue-chip chemicals
company (‘ChemCo’), to develop a framework for sustainable business decision-
making. The supply chain impact framework was used to produce a six-stage
analysis that allowed the assessment of ChemCo’s operations and products on key
stakeholders and contributed to key strategy setting and innovation processes. Of
most significance to ChemCo were the final two sustainability accounting stages of
this work, which found that the external environmental benefits of one of its products
in use (a refrigerant lubricant) were eight times greater than the external environ-
mental costs produced by the entirety of ChemCo’s operations. These findings helped
inform ChemCo’s future economic, social and environmental sustainability strategy,
whilst the action of conducting the research fostered greater communication and
understanding between different sections of the business, developed new data
collection and management processes and helped embed sustainable development
objectives throughout the organization. Copyright © 2006 John Wiley & Sons, Ltd
and ERP Environment.
Received 16 September 2005; revised 20 January 2006; accepted 6 February 2006

Keywords: sustainability accounting; chemical industry; business strategy; financial value add; external costs; environmental
accounting; sustainable development
Introduction
HEMCO IS A DIVISION OF A LARGE BLUE-CHIP CHEMICALS COMPANY. IT USES ANIMAL, VEGETABLE
C and mineral oils to produce primary chemicals designed to enhance the performance of sec-
ondary products, or improve a particular quality, such as smell, lubrication or emulsion.
ChemCo states that future growth must be pursued responsibly from an environmental
* Correspondence to: James R. D. Taplin, Overseas House, 19–23 Ironmonger Row, London EC1V 3QN, UK. E-mail: sap@forumforthefuture.org.uk
Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment
348 J. R. D. Taplin et al.
perspective, and it also explicitly acknowledges that it has a need to engage more deeply with stake-
holders about its environmental and social performance in order to put its successes and failures into
context, and manage its exposure to regulatory risk.
The ChemCo senior management found it difficult to translate their aspirations for sustainability into
practice in the midst of many other business pressures. ChemCo is a long-standing partner of Forum
for the Future (Forum). Forum was approached to help ChemCo develop a framework for business
decision-making which allows assessment of the impact of operations and products, awards credit for
positive social and environmental outcomes, takes account of the external costs associated with unde-
sirable social or environmental outcomes and contributes to key strategy setting and innovation
processes. Forum’s charitable independence coupled with a strong (critical) relationship with ChemCo
allowed us close cooperation and interviews with senior staff, and access to internal reporting systems,
technical reports, financial analyses and operational management data.
Forum’s purpose in this work was to promote sustainable development by moving ChemCo along
the CSR continuum described by Nelson (2000). This continuum contains three broad stages – com-
pliance, risk minimization and value creation. According to Nelson, companies begin with basic
compliance with local laws and regulations and may then progress beyond this to the stage of risk min-
imization, in which they develop an awareness of their main negative socio-economic and environmental
impacts and develop policies to minimize them. The final step to value creation – creating value for
society and/or themselves – is rare. At the time of this work ChemCo predominantly displayed a com-
pliance and risk minimization attitude to sustainability. This was largely because its thinking had grown
out of its EHS (environment, health and safety) system, where the focus was on avoiding spillages and
accidents. Increasingly, certain people in ChemCo understood sustainability as an opportunity, and that
the best way of successfully demonstrating its benefits to the entire senior management team would be
to reframe it in terms of ‘value creation’. Forum’s sustainability accounting methodology was a means
to enable the reframing by providing a credible and quantitative financial case.
Sustainability Accounting
One of the most valuable aspects of sustainability accounting is that it allows decision-makers with no
environmental experience to make judgements about how they interact with the environment, and what
the probable costs or benefits to themselves or others of their actions are. It brings environmental infor-
mation into the convenient and familiar framework of financial accounting, and can provide the purpose-
orientated information needed to improve the quality of environmental decisions (Bennet et al., 2003;
Burritt et al., 2002; Schaltegger and Burritt, 2000).
Forum’s sustainability accounting has grown out of our environmental accounting methodology, as
described in a joint publication with the UK Chartered Institute of Management Accountants (Howes,
2002). It has been used and developed extensively with a wide range of high profile partners in order
to build their understanding of the need to change their behaviour and then provide them with options
for how to change. Our methodology assumes a framework for sustainability accounting, which is based
on three dimensions and which partitions the costs and benefits of an organization’s actions into one
of 18 categories.
(1) What is the timing of the impact being measured? Is it (a) a snapshot of the state of the stock of a
resource (familiar from financial accounting as a balance sheet), or is it (b) a measurement of a flow
– a change in magnitude of a resource over a period of time (like a profit and loss account)?
Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 15, 347–360 (2006)
DOI: 10.1002/bse
A Sustainability Accounting Framework for Strategic Business Decisions 349
Figure 1. Forum for the Future’s sustainability accounting cube
(2) What is the location of the impact? Does it (a) fall within an organization’s financial reporting bound-
aries, i.e. an internal impact, is it (b) a cost or benefit which is imposed externally of the organiza-
tion on wider society or is it (c) a cost or benefit to the organization of avoiding or restoring the
external impact (which we term the shadow impact)?
(3) What is the type of impact? Is the impact economic, social or environmental?
If these questions, and their answers, are displayed together in three dimensions, the result can be pre-
sented as the sustainability cube shown in Figure 1 (Bent, 2006). Considered in this way, traditional
financial accounting is narrow and only addresses one-ninth of the cube. It is limited to the considera-
tion of internal, economic balance sheet stocks and profit and loss account flows. Our financial sustain-
ability accounting expands the boundaries of concern to not only include environmental and social impacts
of an organization’s actions, but also the externalities that they create, and the shadow costs to the company
of avoiding or restoring the impacts. The difference is illustrated in Figure 1.
Please note, therefore, that the shadow costs we use are not the same as the total external damage
costs to society. Whilst we do use external damage cost calculations in parts of our work, this is not a
useful approach to take with business partners who are frequently taking steps to engage with the envi-
ronmental agenda for the first time. The valuation of environmental damages is a contentious issue and
the multiplicity of ‘competing’ valuation techniques may provide a wide range of alternative damage
costs for the same environmental impact.
The purpose of our sustainability accounting approach is to guide organizations down the road to
greater sustainability, start them thinking about the necessary issues and show them how to incorpo-
rate them in their business models. In our experience the most effective means of doing this is to relate
environmental impacts to their financial consequences to the organization, and to provide real, solid
and justifiable costs of their mitigation or avoidance. Shadow costs therefore give ownership of restor-
ing environmental impacts to their originators, then put a clear and unemotive cost upon them.
The Supply Chain Impact Framework
Whilst the sustainability accounting cube is a representation of the totality of the elements that we con-
sider, the supply chain impact framework (SCIF or the framework) is a way of unpacking elements of
DOI: 10.1002/bse
it and giving them greater operational detail. It enables organizations to locate their impacts, identify
current knowledge gaps and target research efforts to the most important areas. Applied to ChemCo,
the framework looks
(1) across the supply chain
• from raw materials through suppliers, manufacturing (ChemCo in this case), customer, end user
and finally disposal
(2) across six accounts of impact (with the sustainability accounting cube categorization in brackets):
(a) financial value added (internal, economic, flow)
(b) qualitative accounts
(c) indicators
(d) internal costs and benefits (internal, environmental, flow)
(e) quantification and shadow costs (shadow, environmental, flow)
(f) product impacts (external (to ChemCo), economic, flow)
(3) triple bottom line impacts
(a) economic (E), social (S) and environmental (N)
(b) benefits (+) and costs (−).
For senior ChemCo managers, ‘sustainability’ had little tangible meaning, especially compared with the
business issues and measures they are used to and measured against. For them, the framework pro-
vided a map, which put sustainability into understandable terms. It provides a way of giving an account
of their performance and allows them to hold separate parts of the organization to account.
However, rather than addressing the entire framework, our initial programme with ChemCo looked
at targeted sections of it to see which elements were of most use in their decision-making, and how they
could use the results to further their goals of sustainability. The following sections will address each of
the six strands of our work in turn.
Financial Value Add

A financially sustainable organization adds financial value to resource flows in producing goods and ser-
vices. An indicative measure of financial value added is given by the sum of revenue minus payments
to suppliers. The way that this value added is then allocated to other stakeholders (for example, employ-
ees, shareholders and government) gives an indication of the value that ChemCo is adding to its key
stakeholders, their relative bargaining power and how its resources are allocated.
This first analysis compared financial value added by ChemCo against that added by its key
competitors in order to examine its longer-term fiscal sustainability and identify how this varied across
the industry. The crude summary of results (Table 2) shows that all the organizations studied had large
pay-outs to suppliers, leaving values added at 18–25% of turnover. The vast majority (70–90%) of this
value added was paid to employees, and consequently there were almost no retained profits across the
industry. These figures suggested that there may be a high degree of commoditization (little product
differentiation across an industry leads to little value capture from the customer), and indicated that
there was a consequent need for ChemCo to find ways to differentiate and so secure more value from
customers.
Whilst interesting, this study provided limited new insights into the business for ChemCo, since it
already used financial value added analysis in its management operations, but it did locate the project
as a whole within a business context. The analysis established Forum’s credibility with senior manage-
ment of ChemCo on business issues – a crucial part of stimulating real change in the experience of the
authors.
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Accounts Financial Qualitative Indicators Internal Shadow Product

value added account costs environmental impacts
Stage costs
Raw materials E SEN SEN SN N SEN

+− +− +− − − +−
Supplier E SEN SEN SN N SEN
processing +− +− +− − − +−
ChemCo E SEN SEN SN N SEN
processing +− +− +− − − +−
Customer E SEN SEN SN N SEN
processing +− +− +− − − +−
End user E SEN SEN SN N SEN
+− +− +− − − +−
Disposal E SEN SEN SN N SEN
+− +− +− − − +−
Table 1. The supply chain impact framework. Those sections of it that were explored with ChemCo are shown shaded. E =
economic, S = social, N = environmental, + = benefits, − = costs
Employees/value added 91% 90% 69% 90%

ChemCo Organization A Organization B Organization C
£’m £’m £’m £’m

Customers 669 5849 23 511 1978
Suppliers (536) (4387) (17 590) (1613)
⇒Value added 133 1462 5 921 365
Value added/customers 20% 25% 25% 18%
Allocated: £’m £’m £’m £’m
Employees 121 1310 4065 327
Government (incl. tax) 2 41 979 15
Communitya
Shareholders 43 74 537 8
b
Lenders 91 251 102
Retainedb (33) (54) 90 (87)
Total 133 1462 5921 365
Table 2. Financial value added of ChemCo and its three largest competitors in year T0
a
Community figures are generally less than 0.1% of value added.
b
For ChemCo, ‘retained’ is also equivalent to net contribution to value. Net contribution to value is derived from net profit after
tax – hence, for ChemCo there is no separate amount for lenders.
Qualitative Account
Our full sustainability accounting methodology contains five steps (Figure 2). The first two stages are
an iterative process of boundary setting and data identification that creates a set of qualitative accounts.
The qualitative accounts constructed for ChemCo gave a description of their main sustainability-related
impacts. They are an essential first stage in understanding the most significant risks and opportunities
that need further quantitative analysis.
The framework is a means of extending our sustainability accounting in directions that are of most
use to the partner organizations we work with, and giving additional definition to specific questions they
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Figure 2. The five steps in creating Forum’s shadow sustainability accounts
need answering. The five-step sustainability accounting process shown above therefore sits within a
number of the six stages of the framework presented in Table 1. As already discussed, the framework’s
qualitative account is analogous to steps one and two of the sustainability accounting methodology. By
combining this qualitative analysis with the quantitative process shown in stages three to five in Figure
2, the shadow environmental accounts are calculated, and presented in stage five of the framework.
The boundaries of an organization’s impact depend upon (a) the sectors of business activity that need
assessment, and (b) how much influence the organization has over the creation of the impact. Usually
it is not possible for a large organization to catalogue all impacts of all suppliers and all products at first.
A starting point is to consider a limited number of impacts across all suppliers and products, or to con-
sider the up- and downstream impacts of certain products.
In the case of the qualitative account, five products were chosen that best matched the data available.
The products were a refrigeration lubricant, a fatty acid used in soaps, sorbitan chemistry used in food,
an adhesive used in electrical assembly and stearate stabilizers for use in hardening of plastics.
A clear scoping of the sustainability accounting boundaries identifies the information needed.
However, it is almost inevitable that in the process of distinguishing the impacts that fall within the
boundaries that have been set it will become clear that some impacts do not actually sit very comfort-
ably within them, or that further impacts come to light that also need to be included. In such instances,
the boundaries may need to be re-drawn, which in turn will influence the data that is needed. In this
way, the boundary-setting and data identification stages are an iterative process that continues until the
definitive scope of the sustainability accounting analysis has been solidified.
With ChemCo, we used life cycle analysis, stakeholder feedback and interviews across the organiza-
tion to scope the critical impacts within the boundaries of the study. For instance, within ChemCo itself,
all the main board directors were interviewed, as were any other personnel with specific environmen-
tal, social or investor responsibilities. The result was a qualitative matrix detailing the external costs and
benefits to a wide spectrum of ChemCo’s stakeholders (including customers, end users, suppliers,
employees, the community, the public sector and investors) split out by type of impact (economic, social
or environmental). This captured a diverse range of impacts, and drew ChemCo’s attention to many
issues that it had not previously been aware of. The matrix also enabled the issues to be organized in a
manner which gave an overview of the entire picture, and facilitated informed decision-making as to
where greater attention needed to be focused in more detailed future stages of the accounts.
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However, alongside these very positive outcomes, there were also a number of potential limitations
with this study. In particular, the drawing of boundaries is an issue fraught with difficulties and con-
tradictions that can, at times, seem arbitrary (for instance they may include the flow of materials from
the first supplier, but not from their suppliers) unless tight definition is given to the study. Further-
more, the qualitative approach gives no weighting of relative importance to the various impacts, nor is
responsibility for these impacts allocated to different stakeholders in the simple matrix.
In addition, it has been argued that any attempt to measure the sustainability of an organization that
does not set its boundaries to include the whole system (incorporating a geographical sweep that encom-
passes not only the farthest reaches of an organization, but also those of the industry as a whole, and
temporal boundaries extending to include future generations) may be incomplete, possibly dangerously
so (Gray, 2002; Gray and Milne, 2002; Milne and Ball, 2005). This view is based on the fullest possi-
ble definition of sustainability, and is strongly related to the definition originally proposed by the Brundt-
land report (World Commission on Environment and Development, 1987).
Undoubtedly, a whole systems approach to accounting is desirable, but the realities of the interest,
influence and practical impact that the businesses undertaking this accounting have usually make an
all-embracing study inappropriate. Forum’s work accounting for sustainability at an organizational level
(as with this ChemCo study) instead takes the view, shared by the authors above (Gray and Milne, 2002),
that it is crucial to take incremental steps (clearly framed) to build wider understanding. It is the view
of the authors that these approaches should therefore also be appropriately described as sustainability
accounting.
Indicators
In modern organizations, what gets measured gets managed. Most large organizations, ChemCo
included, monitor their performance through a series of indicators, and use regular reporting to make
this information available to decision-makers to enable them to draw the best strategic conclusions. To
effectively embed sustainability within an organization, it is necessary that decision-makers become
familiar with considering sustainability issues in the course of using their normal indicators. In order
to see how ChemCo’s current indicators relate to sustainability they were collated and mapped against
the impacts identified in the qualitative account.
ChemCo collects data on its own operations as part of its regular reporting, but the indicators it con-
siders are mostly related to its existing environmental, health and safety (EHS) system, and are used for
external reporting. In addition, they relate to impacts with negative associations, with an emphasis on
managing them down, rather than to positive factors, the enhancement of which would improve the
business and drive growth. The focus is therefore squarely on ‘risk minimization’ and attempts to ensure
that no value is destroyed (from poisoning a river, for instance), and not linked to value creation. In this
traditional mindset, the environment easily becomes perceived to be a burden, and sustainability is pre-
vented from being viewed as an opportunity.
Comparing ChemCo’s measured indicators with their identified qualitative impacts, and mapping the
relationships between the two, demonstrated that ChemCo was not gathering indicator data for a variety
of important impacts. In particular, positive environmental indicators were absent, and it was clear that
ChemCo needed to expend more effort on identifying and quantifying their positive impacts in order
to obtain a complete or balanced picture and to encourage a shift in perspective.
This study was useful for making the link between the EHS systems and data collection which
ChemCo already had in place, and their ultimate environmental, social and economic impact. However,
thus far in the analysis, impact was primarily expressed in a qualitative sense. Having successfully led
ChemCo to this stage using techniques with which they were largely familiar, the next step was to
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Internal environmental account Internal social account
£k £k
Waste disposal 500 Health insurance 3000

Water clean-up 1400 Occupational health 370
Other 92 Working practice training 250
Other 80
Total 1992 Total 3700
Table 3. ChemCo’s internal social and environmental accounts
encourage a leap in their learning by drawing up internal and shadow accounts that aimed to put a value
on the impacts.
Internal Costs
Not all of the social and environmental impacts of ChemCo’s operations fall outside its sphere of direct
financial control, or impose un-recompensed external costs or benefits on society. The purpose of looking
at ChemCo’s internal accounts was to draw out from existing accounts the elements of environmental
and social impacts that have already been internalized – through, for instance, fines for breaching con-
sents, spending on compliance, savings from increased resource efficiency and additional sales driven
by improved reputation. The boundaries for this study were thus initially set around the financial pay-
ments and cost savings made by ChemCo through improving their environmental or social performance
across the entirety of their operation over which they have direct administrative control.
In the end, however, difficulties in obtaining the necessary data meant that we focussed attention only
on the costs incurred, which results in the possible problem of reinforcing sustainability as a cost centre
mindset. High-level aggregated annual results are shown in Table 3.
ChemCo had never before considered its internal social and environmental expenditures in this way,
and was surprised at the scale of resources that were already being committed to risk mitigation. This
naturally led to the second concern of whether it was getting full value for the resources it was expend-
ing. The initial analysis was unable to answer this question because the exclusion of benefits from the
study distorts the results. There is currently no way of comparing the relative magnitudes of internal
costs and benefits, and if risk mitigation is the main motivation in making internal social and environ-
mental expenditures then account must also be taken of the value of risks avoided. For instance, working
practice training of £250 k may result in significant returns to the business, such as the foregone
financial and reputational costs of cleaning up accidents that might otherwise have occurred, or may
also result in higher levels of labour productivity than without the training.
Shadow Environmental Costs

In a market economy, prices are the key signal that informs behaviour. However, if the positive values
or negative costs of the manufacture, operation and disposal of a product are not accurately captured in
the price paid for it, then external benefits or costs are imposed – often on people other than the pur-
chaser. These externalities arise because products are composed of both private and public ‘goods’. The
private goods are those that are owned by a definable party and have been paid for in some manner,
with the cost of that payment translated into the eventual price that the consumer pays. Public goods
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(such as atmospheric quality, clean water supplies etc.), on the other hand, are not owned by organized
legal entities and so their use is not regulated in traditional economic markets. The market price paid
is therefore likely to only cover the value of the private goods that are consumed in a product’s manu-
facture, and not the public ones. Our use of shadow environmental costs is an attempt to correct this
inequality and to get the prices right – by including the ‘full cost’ the aim is to give the market the correct
signals for making the most appropriate decisions (Bebbington et al., 2001; Richardson and Bent, 2003).
The shadow environmental cost is ‘the cost at today’s market prices the organization would have had
to incur to restore or avoid its most significant external impacts over the accounting period’ (Howes,
2003). Subtracting this cost from the financial bottom line of an organization shows the amount by
which profits would need to reduce in order to impose no significant environmental externality. They
therefore represent the financial exposure of the organization to the legislative or political risk that envi-
ronmental damage is prevented by government or other stakeholder pressure. They are also a measure
of the hidden subsidy the organization receives, because society, now and in the future, will have to deal
with the environmental consequences of its actions.
Figure 2 (CIMA and Forum for the Future, 2002; Howes, 2003) shows the five steps used in calcu-
lating our sustainability accounts, and shows that the actions of determining ChemCo’s qualitative
accounts and conducting the indicator analysis wholly or partially served to complete stages one to three
of the analysis. Stage four was therefore to calculate ChemCo’s sustainability gap – the difference
between current performance and a level that leaves the environment no worse off at the end of the
accounting period than it was at the beginning (Gray et al., 1993). Determining what constitutes a sus-
tainable level of performance is frequently difficult in a society that is only just becoming aware of the
range and magnitude of external costs that exist. Our sustainability accounting methodology relies on
the latest science and policy goals to set sustainable levels. For instance, we employ hard emissions
reduction targets from domestic legislation or international agreements where possible, and supplement
this with our own research and expert opinion from academics or policy makers where sustainable levels
of pollutant emissions have not been officially codified into environmental legislation.
The final stage in our shadow environmental accounting is to put a financial price on the costs of
closing this sustainability gap. This approach does not attempt to price the external costs to society of
the non-sustainable pollutant emissions, but instead looks at what the costs to the organization would
be to avoid producing these emissions in the first place, or to restore their impacts to a sustainable level.
These costs are referred to as ‘shadow costs’.
For preference, the shadow cost is calculated from specific plans to avoid environmental impacts. For
instance, one method of reducing carbon emissions might be to switch from using a fossil-fuel derived
electricity to a renewable energy alternative. The avoidance cost of creating these carbon emissions can
therefore be obtained through a quote from a renewable energy provider to supply the quantity of power
required.
However, where these are not available, restoration costs are used instead, for instance the cost per
tonne of carbon offsetting (as quoted by a specialist carbon project investor for the planting of trees to
offset the emissions for instance). Where possible, restoration values for each separate environmental
impact are used, but in instances where direct market-based figures do not exist impacts are converted
to an alternative equivalent unit (for instance climate change gases transformed into carbon equivalents)
for which a corrective strategy does exist. It is important to note that the value of the shadow costs is
unlikely to be the same as the full societal value of the external costs if these impacts remain unchecked.
For instance, the process emissions figure in Table 4 includes £1.45 m of shadow costs relating to
greenhouse gases. ChemCo emitted the equivalent of 371 thousand tonnes of CO2 in the study year. The
sustainable level of emissions was calculated based on the call from the International Panel on Climate
Change that emissions are reduced by 60%, giving a sustainability target for ChemCo of 149 thousand
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Shadow environmental cost
£k
Impacts to air
Total process emissions 3100
Total transport 100
Total waste 100
Total impacts to air 3300
Impacts to land
Waste disposal to landfill 600
Impacts to water
Water use & sewage Not quantified
Total shadow environmental costs 3900
Table 4. ChemCo’s shadow environmental accounts
Figure 3. ChemCo’s shadow environmental accounts split by major business operations and pollutant emissions
tonnes, and a resultant sustainability gap of 223 thousand tonnes. If all these emissions were offset it
would cost £6.5/tonne (the market price of a UK provider of offset services), giving a total of £1.45 m.
The application of shadow costs to each pollutant emission of each impact being studied by the sus-
tainability accounts provides a total cost of meeting an environmentally sustainable level of performance.
Table 4 and Figure 3 show the high-level aggregated annual shadow accounts for ChemCo.
The results showed that ChemCo’s total shadow environmental costs amounted to almost £4 million,
with 83% of this cost attributable to process emissions, of which greenhouse gases, in CO2 equivalents,
made up the greatest proportion (as shown above). Note that Figure 3 does not provide an indication of
the total magnitudes of the physical quantities of each pollutant emitted. This is because the restoration
or avoidance costs associated with each differ greatly in relation to the damage that they cause, and the
ease of removing or remedying their effect. In actuality, CO2 has lower shadow costs per unit of pollu-
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tion than almost any other pollutant, with the result that it accounts for almost 371 thousand tonnes of
the total 373.5 thousand tonnes of pollutants emitted, yet accounts for only 40% of the total costs.
Although these accounts do not capture everything, they do provide an indication of scale, and show
that ChemCo is receiving a ‘subsidy’ from society of about £4 million. When compared with its cycli-
cal trading profit of approximately £10–50 million, this demonstrates that ChemCo has a significant
exposure to more stringent environmental regulations. Furthermore, with internal environmental costs
(calculated in section 3.4) of almost £2 million, this throws up the question of how well these current
resources are being used to mitigate ChemCo’s environmental impact.
Product Impacts
The final stage of the framework analysis was to address one aspect of the impacts of ChemCo’s prod-
ucts in use. This study supplements the previous analysis, and builds on it by extending the sustain-
ability accounting methodology into areas that are usually beyond the scope of a standard analysis. Please
note, however, that it does not make any comment on the wider sustainability of ChemCo’s business,
or ask the question of whether ChemCo products are needed at all from a sustainability perspective.
In addition to the direct operation of an organization, the use of the goods and services produced also
leaves a significant imprint on the economy, society and the environment. The responsibility for these
downstream impacts is not straightforward, since the dynamic interplay of producer innovation and cus-
tomer demands means that both alter in response to changes in the other, and feed back upon one
another as if in a series of dance steps (Giddens, 1984), but they must nevertheless be accounted for.
With ChemCo, one product was chosen to investigate the magnitude of these downstream impacts, and
see where the costs and benefits of it were accruing.
Product x is a lubricant produced by ChemCo for use in domestic refrigeration applications. Follow-
ing the introduction of the Montreal Protocol to phase out ozone depleting substances such as
chlorofluorocarbons (CFCs), a new class of ozone benign refrigerants based on hydrofluorocarbons
(HFCs) needed to be developed. These HFCs were not compatible with mineral oil, so a new class of
lubricants was also designed for use with them, of which product x is one such example. These new
products were also affected by legislation deriving from the Kyoto Accord, which required major
improvements in energy efficiency, and by consumer demand, which required a reduction in refriger-
ator noise levels.
The impact that product x has in refrigeration can be considered in two parts – the overall impact
that domestic refrigeration has on people’s lives (in comparison with ‘old’ or no refrigeration), and the
difference that the lubricant makes to the process (in comparison with ‘old’ lubricants). However, it was
decided that ChemCo could only realistically account for the specific impacts of product x in use.
The two key features of this product are (1) that it increases the efficiency of refrigeration compres-
sors, and so reduces the energy used by domestic appliances, and (2) that it reduces refrigerator noise.
The primary environmental benefits to society of this product are therefore a reduction in the quantity
of electricity that needs to be generated to meet refrigeration needs (so potentially necessitating fewer
power stations), and an associated decline in any polluting emissions that stem from that generation
(and the costs of repairing any damage that they cause). The product also brings social and economic
benefits directly to the consumer in reduced noise (thereby possibly reducing domestic stress, and
increasing productivity), and in reduced energy bills.
Refrigeration compressors, as is the case with many products, consume far greater quantities of
energy in use than they do in manufacture. Of the total energy used by a domestic compressor through-
out its life-cycle, 97% is estimated to be consumed during its consumer operation (ChemCo, personal
communication). Globally, over 700 million refrigerator compressors are in use, with a yearly energy
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consumption of 500 TW h, and a total energy cost of some £39 billion (assuming an average 12 cu ft per
refrigerator, running at an average of 241 W for 8.25 hours per day (with the remaining time spent on
standby using zero, or limited, power), and an average UK cost of electricity of 7.76 pence per kilowatt
hour).
Product x can deliver up to 20% better energy efficiency in domestic compressors. This amounts to
an average saving to each customer of over £11 per year, or £170–226 over the 15–20 year lifespan of
the appliance. However, ChemCo itself receives less than £0.50 in revenue from each fridge.
If product x were used in all 700 million refrigerators, the 20% energy efficiency that it provides has
the potential of delivering 100 TW h of annual savings globally – equivalent to the annual output from
14 power stations (based on an 800 MW oil fired power station operating 365 days per year, 24 h per
day.) This saving has the potential to reduce global emissions of CO2 alone (let alone the other pollu-
tants from fossil-fuel electricity generation) by 43 million tonnes. Ultimately, however, ChemCo’s market
share is closer to 45 million refrigerators worldwide rather than 700 million, which results in a poten-
tial energy saving from the use of product x of almost 6.5 TW h annually. This power saving, assuming
that it would all otherwise have been drawn from grid electricity systems fed by fossil-fuel power sources,
would produce a corresponding reduction in emissions of CO2 of almost 2.8 million tonnes per year.
This may be compared with ChemCo’s total calculated CO2 emissions of some 0.36 million tonnes per
year from its processes (as outlined above).
These results allowed ChemCo to view product x in a new light, and produced a number of strategic
recommendations. For product x itself, it was clear that ChemCo should expand its marketing offer to
include its financial savings of resource productivity, and take steps to try and use this to capture greater
value from the end user of the product. In terms of its wider strategy, it was also suggested that ChemCo
should focus research and development resources on further products that increased the financial
savings of resource productivity, so generating more value for consumers, providing higher margins for
ChemCo and potentially reducing externalities for society, now and in the future.
Conclusion
The chemicals industry is crucial to the functioning of the modern world, but there is a growing aware-
ness internally and externally that its long-term survival depends upon improving its economic, social
and environmental sustainability (CIA, 2004; Chemistry Leadership Council, 2005). ChemCo wanted
to explore this idea in more depth, so used the supply chain impact framework to investigate its posi-
tion within the industry, and the range of internal and external social and environmental impacts that
it, and the wider industry in general, were responsible for.
The modular nature of the framework, and its ability to pinpoint discrete areas of business operation
for further investigation, allowed ChemCo’s management to better engage with sustainability issues. It
led them through a series of sustainability steps, which developed their awareness of the critical issues
and showed how they related to aspects of their business. By starting the work plan from a position with
which ChemCo was already familiar (the financial value added analysis), management felt comfortable
with the foundations of the study, and could see how novel and more sophisticated steps along the inves-
tigative route were built on earlier stages. Furthermore, the actions of collecting the data necessary for
completing the study fostered greater communication and understanding between different sections of
the business, developed new data collection and management processes and helped embed sustainable
development objectives throughout.
The key results showed that industry profits were low and cyclic, and that many significant impacts
were being imposed on society both up- and downstream of ChemCo itself. Using shadow accounting,
DOI: 10.1002/bse
it was calculated that ChemCo was receiving the free benefits of the assimilative capacity of the envi-
ronment, to the value of almost £4 million per year. Set against this were the potential resource efficiency
and financial savings stemming from the use of its products, of which one, product x, resulted in envi-
ronmental savings to society that were approximately eight times greater than the emissions released
by the entirety of ChemCo’s operation. This product also provided substantial financial benefits to its
end users, but ChemCo was failing to capture an incentivising share of that benefit, and so neglecting
its full potential.
The sustainability accounting methodologies used with ChemCo were invaluable for planning busi-
ness strategy and guiding the organization towards a more sustainable future. For instance, ChemCo
subsequently started to develop value propositions that build on the economic, environmental and social
benefits of its products. Furthermore, it has also identified the need to provide greater sustainability edu-
cation for its staff, and translated the results of the study into a policy for targeting future research spend.
In addition, this work demonstrated the adage that ‘what gets measured gets managed’, and painted the
new, bigger picture of ChemCo’s operations and place in society. By seeing the world outside traditional
accounting boundaries, ChemCo was able to link greater profitability with reduced environmental
damage: the elusive ‘win–win’ situation.
Sustainability accounting provides developmental opportunities, institutional learning and transfor-
mational effects on society and the environment that make it appealing for organizations to engage with.
This case study has shown it to be a process of generating insights that contribute to how a company
makes money in a less environmentally damaging manner. With these tools, the goal of delivering long-
term sustainability in a financially attractive manner acceptable to all is therefore moving ever closer to
being a reality.
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Giddens A. 1984. The Constitution of Society: Outline of the Theory of Structuration. Polity: Cambridge.
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Corporate Citizen 2(3): 9–16.
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66–70.
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DOI: 10.1002/bse

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Business Strategy and the Environment

Bus. Strat. Env. 15, 347–360 (2006)

Received 16 September 2005; revised 20 January 2006; accepted 6 February 2006

HEMCO IS A DIVISION OF A LARGE BLUE-CHIP CHEMICALS COMPANY. IT USES ANIMAL, VEGETABLE

Figure 1. Forum for the Future’s sustainability accounting cube

The Supply Chain Impact Framework

Financial Value Add

Accounts Financial Qualitative Indicators Internal Shadow Product

Raw materials E SEN SEN SN N SEN

Employees/value added 91% 90% 69% 90%

£’m £’m £’m £’m

Figure 2. The five steps in creating Forum’s shadow sustainability accounts

Internal environmental account Internal social account

Waste disposal 500 Health insurance 3000

Table 3. ChemCo’s internal social and environmental accounts

Shadow Environmental Costs

Shadow environmental cost

Table 4. ChemCo’s shadow environmental accounts

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