Overshoot impact of companies

Here we explain how the Ecological Footprint metric is applied to companies. We:

  1. outline the rationale for utilizing the biocapacity lens,
  2. define the central research question for companies,
  3. spell out how to answer this question,
  4. discuss data needs for assessments,
  5. explain the analytical particularities when assessing B2B companies,
  6. provide background on available methods and analytical approach that allow researchers to address this research question, and
  7. point to a section describing the relevance of such an analysis for ESG.

 

1. The benefit of going beyond carbon footprints

The word ‘future’ has become next to synonymous with climate change and artificial intelligence.

On the climate side, most perceive the “challenge” as a collective choice problem about carbon emissions, characterized by tensions between individual and societal interests. However, the challenge extends beyond carbon emissions, and even more importantly, it largely does not hinge on collective decision-making. In fact, incentives for one’s own actions are far more powerful than most imagine. Recognizing this has direct, practical implications for any investor. The implications become even more practical and potent the less others address the problem.

every company uses biocapacity

Every human activity uses biocapacity. This competition for biocapacity is what Ecological Footprint accounts track.

Here below are brief explanations of how using a biocapacity lens offers more robust insights than carbon emissions only when analyzing the future-fitness of any entity, including companies.

Certainly, climate change will be part of the package that shapes our future. Just that climate change will be accompanied by many other environmental pressures. And all these pressures compound. The simple reason is that economies are in fierce competition for what ecosystems can regenerate, leading to climate change, biodiversity loss, pollution, water stress, and food and energy insecurity.

The competition for everything nature can regenerate has become so voracious that, currently, human demand exceeds, by at least 70%, what Earth’s ecosystems can renew.

This regenerative capacity of the planet, even though it can be overused for some time, is ultimately the overarching material factor that limits everything. Regeneration simultaneously limits:

  • fossil fuel use (since the biosphere’s ability to sequester excess CO2 emissions is limiting fossil fuel use more than the remaining stocks underground),
  • mineral and ores exploitation extraction (since the impacts of the mining process, not the amount of ores underground, primarily limit access to these materials. Mine explorations and operations inevitably damage ecosystems. Also, it takes energy, often fossil fuels, to dig up, concentrate, and process these materials, requiring biocapacity as well.), and
  • food and fibers inputs, as well as any other biological product or service economies depend on (since their provision all require regeneration. They are therefore also in competition with the other two uses mentioned above).

Hence regeneration is the unifying theme for all materials dependencies of the human economy, from resource input to waste emission. This makes regeneration, which is measured by biocapacity, a broader concern than merely carbon emissions. It becomes a way to connect most environmental “dots”.

 

2. Our research question for companies

When studying human dependence on the biosphere, it becomes more insightful and meaningful to analyze it comprehensively. Specifically, this means that any study need to include the relationship of the analyzed entity with the entire biosphere, not just with the local ecosystems. Analyzed entities can be as big as humanity, as small as one toothpick, or anything in between such as a country, a city, or an individual person.

This expanded view of a given human activity on the entire biosphere is significant for two reasons: local gains can be lost (i) by increased impacts elsewhere (displacement effect), and (ii) by more demand stimulated elsewhere (rebound effect).

Therefore, when analyzing companies and their relationship to the biosphere, Global Footprint Network considers the following research questions the most fundamental one:

The central research question for companies is: Per dollar contribution to GDP, how much is the company increasing or decreasing global overshoot?

(Value-add of a company is its contribution to GDP (gross domestic product). Essentially, it is company revenues minus input costs. This is about the same as wages, taxes, and profits combined). Once this question can be answered, a whole list of related questions become relevant as well.

This question is fundamental, as it addresses the company’s relationship with the biosphere comprehensively. Possibly even more importantly, this way of analyzing also links the resource question to companies’ strategic needs. Because companies that can reduce global overshoot while expanding are well positioned to gain in value as that predictable future of climate change and resource constraints manifests. Therefore, understanding one’s resource exposure becomes a central parameter of a company’s long-term value and is therefore essential input to any business strategy.

 

3. Answering the question

The research question can be addressed from two angles: where would global overshoot be if the company did not exist? Or the question could be asked inversely: where would global overshoot be if the company doubled? Answering the latter one should give the same answer, in the negative, of answering the first.

There are three main components that make up a company’s contribution to global overshoot due to its existence. (To illustrate, we use as an example a household appliance producer and a PV panel producer).

  1. Demand for producing the company’s offering: Companies produce goods or services. We could call that their offering. This piece therefore captures the company’s and its supply chain’s use of resources and energy which are all required to produce or provide their offering (e.g., electric food mixers, PV panels).
  2. Demand for using the company’s offerings over their life cycle: These are the energy and resources the company’s offering uses over its lifetime, once delivered (e.g., electricity used over the lifetime of the company’s food mixer, or the energy and resources needed to maintain the PV panel).
  3. Displaced resource demand: These are the resources and energy embodied in the goods and services that the company offering is displacing (e.g., displacement of less efficient mixers; displacement of carbon intensive electricity with PV generated electricity).

Once this initial research question is answered, many more applications open up.

 

4. Data needs

For companies, data for (1) demand of production is typically available. Since most companies are predominantly energy based, with fossil fuel making up a high percentage of their input, a first approximation builds on information that scope 1-2-3 for carbon data can typically deliver. Companies with other significant physical inputs beyond fossil fuel, such as timber companies, furniture companies, paper companies, food companies, or water utilities, would also need to include those aspects into their assessment. Many of those data points are typically available from company reports.

Further, to make the analysis comparable, one also needs to know the company’s contribution to GDP. This allows to show for every company how much demand on ecosystems they make per dollar value added.

(2) Demand for using the product or service over life cycle requires data and information about what goods and services the company delivers, and what percentage of revenue comes from which product. Using Life-Cycle-Assessment (LCA) data, or technical data from company if available, allows us to estimate lifecycle requirements of services and products. If the company is large and has multitudes of different products, such analysis will become labor intensive.

For (3) Displaced resource demand, it takes a market analysis to understand what these products and services displace. In some cases, using reasonable assumptions will be unavoidable. One would have to identify who the competitors of the product and services are, and how they compare in resource intensity per unit of product.

 

5. Additional complexity for highly integrated B2B companies

To follow every value chain of highly integrated companies, feeding various supply chains of other companies, becomes analytically taxing.

As a first approximation, one can consider their products and service as if it was a final product. For example, take a power company selling kilowatt-hours (kWh) of electricity. To simplify the analysis, this electricity could be treated as a final product, independently of what these kilowatt-hours then are ultimately used for. Or financial services. If the assumption holds that the product is indistinguishable from other financial services, then the demand of that activity would be equal to the industry averages as determined with MRIO assessments. If the financial services are focusing on (measurably) more sustainable investments, then one can assess the performance of those investments compared to market averages. Or if a mechanical parts company delivers parts strictly to windmill companies, versus one that delivers strictly to combustion cars, that difference in life-cycle resource use then allows analysts to estimate the difference of their overall demand (displacement effect).

 

6. Accounting Methodologies

Ecological Footprint accounting is well-documented. With many thousands of academic journal articles, including from Global Footprint Network staff.

The principles are simple and transparent, essentially mapping human competition for biocapacity. Hence Ecological Footprint accounts add up all the mutually exclusive parts in a common unit, global hectares. A short explanation of these principles is provided here. The supplementary information of this Nature publication gives a more detailed introduction.

The reference calculations for any analysis are the ones at the country level scale. They are called National Footprint and Biocapacity Accounts. Footprint Data Foundation, in collaboration with York University, Toronto, now produces them annually. This venture is independent from Global Footprint Network to insure neutrality and robustness. Results are available here.

Ecological Footprint standards (www.footprintstandards.org), published in 2009, outline how subnational calculations, including for companies, are kept consistent with the national results. This enhances every assessment’s comparability and consistency.

The MRIO (or multi-regional input output) assessment is a powerful tool to break down national results into subcomponents. They are explained here.

While anybody who has studied the Ecological Footprint principles can do their own Ecological Footprint assessments, to make them consistent requires sticking carefully to the Ecological Footprint standards. Ecological Footprint assessments are similar, but more comprehensive, than carbon assessments. LCA (or Life-Cycle Assessments) provide useful input data for product or service Ecological Footprints. It is also possible to hire Global Footprint Network for high-quality analyses in support of transformative applications. For inquiries contact info@footprintnetwork.org.

 

7. Relevance for ESG

Ecological Footprint accounting does not necessarily cater to international reporting initiatives. Rather it follows its own fundamental research question. The relevance of Ecological Footprint accounting for new standards, particularly the European directive, are discussed here.