New indicators to guide companies towards a sustainable future

She is now developing new tools and indicators that companies and asset managers can use to steer towards a future that preserves the conditions for life on our planet.

What really drives humanity to overexploit the Earth's resources? When researchers at the Centre started looking into this question, they realized they needed more knowledge about the financial sector. Capital from investors has a major impact on which companies emerge, and these companies in turn overexploit the Earth's resources.

“We realized that we had a big blind spot. We needed to understand what was driving the capital market and how it was linked to the planetary boundaries,” says professor Beatrice Crona, science director at the Centre.

The researchers started mapping the area, and when they drew the attention of pension funds and other large asset managers to the importance of their investments for the future of the planet, a question came back to the researchers: What should we do? What should we in the financial sector measure to know that we are investing in something sustainable?

Not just financial sustainability

This was the start of many years of work. Among other things, Beatrice Crona dug into companies' sustainability reports to understand which sustainability indicators they currently measure. Then she had the next insight: the indicators used by the financial sector to measure environmental impact have nothing to do with environmental sustainability. Instead, they measure the risk that a company's business operations will be harmed by a warmer climate and whether there is a risk that the business could be adversely affected by policy decisions aimed at protecting the environment.

“There is a flaw in the system. It measures the financial risks, not how sustainable the company really is”.

More than carbon emissions

But what should companies measure instead? After ten years of work, Beatrice Crona's research team has now begun to find an initial answer to that question. The team has developed a measurement tool, Earth System Impact (ESI), which, in addition to greenhouse gas emissions, also takes into account land use, water use and where the company operates.

“Measuring land use is important because on land there is vegetation that can store carbon. Vegetation also influences how much water evaporates into the atmosphere, which affects rainfall patterns and the local environment.”

Land use and water use also indicate the impact the company has on biodiversity. In addition, the location where a company operates plays a crucial role:

“If compare cutting down ten hectares of forest in the Amazon to doing the same thing in Sweden, the actual impact on the planet will be different,” says Beatrice Crona.

She says the ESI is by no means perfect for measuring sustainability, but it is better than the tools used so far. It is also better than many of the indicators that have been developed by commercial companies in recent years, which have no scientific basis. Most of them focus only on greenhouse gas emissions.

“We need to get away from the carbon tunnel vision because we need to look at more than just carbon emissions.”

Raw material use

Another problem with measuring the sustainability of a company is that supply chains are so long that it is difficult to trace the origin of all components of a product, such as a car or a refrigerator. So even if a company has high sustainability ambitions, a huge amount of work is required to know whether they are actually achieving their goals.

What companies usually know, however, is what raw materials that are used in their products. Based on this knowledge, it is possible to make a rough estimate of the company's environmental impact. To assess this, Beatrice Crona brought together researchers who have worked on the seven main so-called primary sectors: fisheries, aquaculture, crop production, meat production, forestry, oil and gas production and mining. After a thorough scientific review, the researchers identified 15 key variables that can be used across all sectors to assess the impact on the planet and the local environment.

“It is not possible to measure 100 different variables for agriculture, for example, but we need to agree on something that is simple and realistic.”

The hope is that asset managers will now use the 15 variables to make demands on the companies they own and steer them towards a more sustainable future. This is, however, only a first step towards more effective sustainability indicators.

“There is no silver bullet that can measure everything in the way we want. This is one way. We will certainly need to find different ways to understand environmental impacts, but it is important that what companies measure and report is based on science,” says Beatrice Crona.

This text is adapted and translated from an article by Ann Fernholm, published on Stockholm University’s webpage.