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Need for life-cycle insight
One of the biggest challenges faced by enterprises today is to build a successful business with minimal environmental impact.
It’s no wonder then that solutions that decouple business value from resource consumption, and enable sustainable production and consumption, are sought after.
To create businesses and products that are kinder to the planet, a better understanding of the environmental impacts of product life cycles and how these are affected by choices made by producers and consumers is essential. Innovations in business models and product design can both enable and inspire more sustainable lifestyles. So, what’s the way forward?
Taking a holistic view and identifying the “hot spots” within the value chain where interventions have the greatest potential to reduce the environmental impact of the whole system is the first step. This holistic view also ensures that we avoid the risk of simply shifting impacts from one stage of the value chain to another. Such an approach for assessing the environmental impacts associated with all the stages of the life cycle of a product, process, or service is known as life-cycle assessment (LCA).
First carried out in the 1960s, LCAs have evolved since then with standards and taxonomies driving them. But they remain largely exploratory and research-based rather than a means of management monitoring and insight.
We now know the limitations of LCA as an approach to managing enterprise sustainability. Most companies realize the need to adopt more sustainable business models that are not dependent on manual processes or subject matter experts using stand-alone tools and have committed to do so. However, they find that they lack the tools and insights needed to deliver against those commitments.
Traditional LCA is limiting
The conventional approach to LCA solutions is a form of ‘bottom up’ (BU) data analysis. It uses data to piece together factors that result in a specific outcome, leading to insights into the complex systems further up the information ladder.
When using BU analysis for LCA, we start with a single, defined product that is the subject of the study. The materials and processes used to make it are systematically mapped back through the value chain that resulted in that product so that the environmental impacts of those inputs can be quantified.
This is a complex task, requiring specialist knowledge and software tools. Inevitably, it is time-consuming and costly. It would need to be applied to every product a company makes and would have to be repeated if any changes are made to those products. This makes BU inadequate for monitoring or measuring the progress on sustainability across an organization as this would require insights across all products and processes, repeatedly. Hence a BU approach to LCA falls short of giving businesses the insights needed to drive sustainability.
LCA as a management tool
With ‘activity-based footprinting’, we can make LCA scalable and work as a sustainability management tool.
If we are to measure and manage the environmental consequences of decisions made on material sourcing, manufacturing processes, product design, and routes to market, an LCA on all products is essential as part of the same regular management reporting routines used to track every other KPI in the organization. To deliver on their net-zero commitments and transition to the circular economy, companies need to have the capability to track those KPIs and make informed decisions. At TCS, we take our inspiration from how successful companies manage other complex changes.
Environmental impacts pass through value chains in a similar way to financial costs. Just like there is a measurable cost associated with all activities in a value chain whether it is producing, transporting, or processing materials, there is an environmental cost attributed to each of those activities. Like financial costs, environmental impacts can be reduced by optimizing efficiencies—finding ways of ‘doing more, with less’. Importantly, as with cost, all environmental impacts are passed down the value chain, becoming embodied in, and accountable for, in the final product.
This analogy between financial cost and environmental impact shows us how we can make LCA into a management tool. In management accounting, activity-based costing (ABC) is a method that identifies activities in a company and assigns the cost of each activity to all products and services according to the actual consumption by each. This makes ABC an example of ‘top down’ (TD) data analysis, in which the overarching system of data collection and analysis is captured, allowing detailed models of subsystems to be refined as appropriate. BU methods are the best approach when cause and effect need to be explored and when problems need to be defined; TD approaches are more effective when business problems are known, and the need is to understand and manage them systemically.
Many leading companies use ABC to accurately measure all the elements that define unit costs to a high degree of granularity, thereby facilitating strategic decisions such as pricing, outsourcing, identification, and measurement of process improvement initiatives. What if we use the same allocation methodology but use the environmental impact factors developed for LCA to measure those activities?
In ABC, we might say that every kWh of electricity used in the production of that product costs $0.33 and indicate how energy prices contribute to the unit cost. It would be equally true to say that every kWh of electricity used in the production of the product produced 230g of carbon dioxide equivalent or CO2 e, and we would then understand how the carbon intensity of that energy supply contributes to the carbon footprint of each unit produced.