Session 3: before you begin Back

Reporting all indirect impacts

Including indirect impacts into an organisations’ sustainability report means that the figures reported are higher than they would be if only on-site impacts were reported. So why do this? There are at least four good reasons to do this:

1) To enable meaningful benchmarking

Imagine you are a working for a water suppliers’ association, and you wanted to benchmark various urban water suppliers. Assume water supplier A manages the catchment, pumps water into urban areas, and distributes and bills customers; A is said to be vertically integrated. Assume B1 in another region manages the catchment and sells bulk water to B2, which distributes and bills. The commodity ‘water’ is ultimately delivered by A and B2, but comparing A and B2 on a per-litre-of-water basis will likely to result in B2 having a much smaller impacts, simply because its on-site operations are more limited. It is clear that a comparison of A and B2 is only meaningful if upstream supply-chains are included, as in the BottomLine³ software, based on ISA methodology.

2) To avoid loopholes in reporting

The TBL Reporting guidelines of the Global Reporting Initiative do not require an assessment of indirect, upstream impacts. Imagine you worked for water supplier A and realised that the figures in the annual sustainability report of your competitor B2 are much smaller. If you were concerned about losing a competitive edge because of the negative image cast on your operations, you could simply change the structure of your business, and outsource or demerge into A1 and A2, with A1 taking care of your catchment and the pumping. All of a sudden, the new A1 would look much cleaner and greener, even though operations haven’t changed at all! This obviously doesn’t make sense, and constitutes a loophole which sooner or later will be plugged. This BottomLine³ software will treat A and B in the same way, whether they source from company-internal or –external supply chains.

3) To reward and encourage the greening of supply chains

Imagine you worked for water supplier A, and you were thinking about how to improve your environmental performance. You know that your pumps use up a lot of electricity causing greenhouse gas emissions which feature in your (GRI-type) sustainability report. However, replacing pumps with better ones is very expensive. You know that your purchases of basic chemicals entails a lot of embodied emissions, and you might have thought of a way to drastically reduce the use of chemicals for a particular water treatment process. However, there is no incentive to do so, because emissions embodied in the chemicals you buy are an indirect, upstream impact, and not asked for in GRI-type reports. You forgo this effective and economical way of reducing your impact; your choice of abatement options is restricted to on-site measures, which may not be the low-hanging fruit you were looking for. This BottomLine³ software shows you which measures give you the best improvements for the least cost, upstream or on site.

4) To increase attractiveness to customers

Imagine if everybody reported including all upstream impacts. Not only would you be rewarded for measures that greened your supply chain, but also by greening your own business you will look more attractive to existing and potential customers, because your on-site impacts would appear as upstream impacts in their sustainability report! That’s why it’s in your customer’s interest to switch from their existing suppliers to your company.

5) To inform about real risk

Imagine you talked to a manager of an ethical investment portfolio. You hear that no urban water supplier is included in the portfolio. When companies were screened, water suppliers became ineligible because of their high greenhouse gas emissions stemming from water treatment processes. These emissions were seen as a financial risk under anticipated greenhouse taxes. You find that many manufacturing firms are part of the portfolio, and that some of these use large amounts of aluminium. You look up how much electricity is needed to make aluminium, and estimate the greenhouse gases embodied in manufactured aluminium. To your surprise you find that some of the manufacturing firms create a higher greenhouse burden than your own water company A, and therefore are associated with a higher financial risk under future greenhouse taxes. The only difference is that the manufacturing firms’ risks are “hidden” in their upstream supply chains, which the investment manager overlooked. This BottomLine³ software based on ISA methodology reveals hidden risks.

Supply chain reporting