?Ecobalance?: A tool for environmental financial management

High levels of environmental concern have provided the impetus for German firms to develop sophisticated systems for identifying, measuring and tracking environmental The "Ecobalance" as a Tool for Environmental Financial Management file:///Users/lsc6v/Desktop/OSI_pdf/WHI001.html[10/1/14, 1:19:52 PM] performance. This article describes the development and use of a new instrument, the "ecobalance," to collect and organize environmental data for the purposes of pollution prevention, cost reductions and environmental financial management. "... when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind." William Thompson (Lord Kelvin) Environmental issues are a growing strategic concern for businesses in both the United States and Europe. Rising consumer sentiment, increasingly stringent governmental regulations and skyrocketing costs for pollution control and waste disposal are affecting the competitive position of firms on both sides of the Atlantic. During the past few years, several firms in Germany have responded to these challenges with a new managerial tool--the ecobalance. In many aspects similar to the American concept of environmental auditing and/or environmental reporting, ecobalances also incorporate aspects of product life cycle analysis. As such, they offer a useful method of evaluating environmental impacts for purposes of pollution prevention, bridging the gap between standard accounting practice (where data is expressed solely in monetary terms) and qualitative environmental reporting. In comparison to the United States, Germany is a small country, about the size of Michigan and Ohio in area. Germany's population is also much smaller than the United States, but its population density is much greater--almost ten times larger. Thus, Germans tend to be more aware of and demonstrate greater concern about environmental issues than Americans. A recent poll by Focus magazine asked citizens of many countries to prioritize the problems they were "most worried about." In Germany, 67 percent listed the environment as their top concern (Schwarz, 1993). In the United States, the environment ranked third (tied with racism and unemployment), received a support rating of 34 percent. Germany has a history of environmental activism, a well-established Green political party and extremely stringent environmental laws. Its residents spent a larger percentage of their gross domestic product (GDP) on environmental protection than any other nation in the world (Husmann & Scherer, 1993). This article discusses the use of the German "ecobalance" as a managerial tool for pollution prevention and environmental financial management. Specifically, preparation of an ecobalance assists a firm in: a) Identifying opportunities for pollution prevention and cost savings, b) Prioritizing these opportunities for later implementation, and c) Measuring the performance of pollution prevention efforts. Section One provides a brief historical review of the ecobalance approach and differentiates it from other instruments used for similar purposes. Section Two contains the details on how to go about actually conducting an analysis--obtaining resources, defining goals, collecting data and structuring the report. In Section Three, various methods for interpreting the results are discussed. The paper concludes with reflections on the future development of this tool and its usefulness to American firms. The "Ecobalance" as a Tool for Environmental Financial Management file:///Users/lsc6v/Desktop/OSI_pdf/WHI001.html[10/1/14, 1:19:52 PM] What Is An Ecobalance and How Is It Used? The "ecobalance" is a structured method for reporting the physical inflows and outflows of resources, raw materials, energy, products and wastes occurring within a particular organization during a specified period of time.[1] It is similar to the "mass and energy balance" approach, in that data in an ecobalance is collected and reported in a multitude of physical units, e.g., pounds, gallons, square feet, kilowatt-hours, which increases flexibility and speeds implementation. An ecobalance is constructed from three major components: the organization, or firm balance, the process balance and the product balance (EXHIBIT 1). The organization balance encompasses all of the energy and materials going into and coming out of the entire firm over the course of one year. Process balances provide an overview of resource and energy use in specific production processes. Product balances are prepared to assist management in determining the environmental impact of particular product lines. Together, these three balances make up a firm's ecobalance . During the course of preparing its first ecobalance in 1991, Europe's largest manufacturer of nylon stockings, Kunert AG , discovered an enormous shortfall between annual water inputs and annual water outputs. An in-depth investigation revealed a leak deep beneath the firm's manufacturing plant which had existed for more than ten years![2] Lammsbräu , a family-owned beer brewery in northern bavaria, prepared its comprehensive ecobalance as part of an overall strategy to dominate the small but growing market for "eco-beer" in germany. Cost reductions and protection of natural resources are a priority for Staatliche Mineralbrunnens Bad Brückenau , a major bottler of natural mineral waters in middle germany. By keeping better track of water and detergent use, the firm has reduced its materials and waste disposal costs and safeguarded its primary source of supply. These firms were among the first to pioneers of the ecobalance concept. Today, large firms including Siemens, Volkswagen, Allianz Versicherung, Sanyo, Ciba Geigy and Swissair are using ecobalances for controlling purposes. Preparing an ecobalance involves posing questions rarely asked before. Often data expressed in physical units generates new insights. For instance, managers at a bank in southern Germany with 241 branches had sometimes wondered about the strange fluctuations in their bill for total energy use. While conducting an ecobalance analysis, data was collected on the total area (m2 ) of each affiliate. Comparing these figures against the individual utility bills revealed large differences in the energy efficiency of the various subsidiaries. The "Ecobalance" as a Tool for Environmental Financial Management file:///Users/lsc6v/Desktop/OSI_pdf/WHI001.html[10/1/14, 1:19:52 PM] History of the Ecobalance Concept The early roots of ecobalance analysis can be traced to Müller-Wenk's (1978) concept of an "ecological accounting," based on the notion that products whose manufacture entailed higher environmental costs should carry higher prices. Envisioning that departments would eventually be held accountable for their environmental as well as their financial budgets, he developed a set of accounts measuring the environmental impacts of greatest concern at the time. Although difficult to implement in practice, the concept of an ecological accounting did stimulate European researchers to develop other methods for evaluating a firm's environmental performance (Exhibit 2). One line of inquiry focused on assessing the impact of different materials and resources used in a product's manufacture. Swiss researchers developed a method comparing the effects of competing packaging technologies with one another based on "critical thresholds" for environmental damage (BUS, 1984; BUWAL, 1991). Results were expressed as "eco-profiles"--small bar charts illustrating the energy use, air emissions, water emissions and volume of solid waste resulting from each different technology under investigation. This system has since been refined, collapsing all of a product's environmental impacts into a single dimension, the so-called "eco-points" (Ahbe, Braunschweig and Müller-Wenk, 1990). Another branch of investigation sought to trace a product's use of natural resources and energy throughout all stages of its life. In the United States, attempts to compare products and processes on the basis of energy and resource flows date back to the late 1960s (cf. Commoner, 1971). Isolated studies were carried out in the following decade, e.g., Franklin Associates' work on beverage containers (Hunt and Franklin, 1974) and Arthur D. Little's (1977) study of disposable vs. cloth diapers, but research in this area decreased as public interest in environmental issues faded during the late 1970s and early 1980s. A renewed wave of environmental consciousness manifested itself in the late 1980s. Shoppers debated whether paper or plastic was the better choice at checkout counters while young parents anguished over the choice of cloth vs. disposable diapers. Studies investigating the environmental impact of products over their entire life cycle--resource extraction, refining, manufacturing, transportation, use and disposal--came into vogue, accompanied by catchy descriptions, e.g. from the "cradle to the grave" or from "womb to tomb." However, their recommendations were not always heeded. In a highly-publicized decision, McDonald's stopped packaging its hamburgers in polystyrene "clamshells" and switched to a predominantly paper wrap, despite evidence that polystyrene packaging was actually less harmful to the environment (Hume, 1991). Product line analysis (PLA) and/or life cycle analysis (LCA) continue to flourish in both the United States and Europe (Projektgruppe Ökologische Wirtschaft, 1987; Fava et al., 1991; Grießhammer, Gensch and Kümmerer, 1992). Two US organizations, Green Seal and Scientific Certification Systems , issue environmental product labels based in The "Ecobalance" as a Tool for Environmental Financial Management file:///Users/lsc6v/Desktop/OSI_pdf/WHI001.html[10/1/14, 1:19:52 PM] part on these methods. A more ambitious project designed