BP sustainability assessment could blaze a trail

CIMA-funded research highlights a BP model that could lead the way in calculating sustainability. By Liz Murby, technical issues manager, CIMA.

‘The scientific evidence is now overwhelming: climate change presents very serious global risks, and it demands an urgent global response.’ So said Sir Nicholas Stern in his eponymous review¹, commissioned by the UK chancellor. The aim of the review was to help assess the evidence and build understanding of the economics of climate change. Stern advocates strong mitigating action which ‘must be viewed as an investment, a cost incurred now and in the coming few decades’.

Moreover, time is against us and he notes that ‘the less mitigation we do now, the greater the difficulty of continuing to adapt in the future’.

Stern’s comments reflect a growing consensus surrounding the urgency of addressing climate change. Awareness of the threat of greenhouse gas emissions, however, is not new or isolated. The 1997 Kyoto Protocol², the result of an agreement made under the United Nations Framework Convention on Climate Change, for example, expressed the commitment by its 160 member countries, to reduce emissions of carbon dioxide and five other greenhouse gases.

In recent accounting guidelines³, eminent business author Mark Epstein reaffirms the need to address the ‘common challenge’ of ‘how to integrate social and political risks of political instability, political corruption, …environmental pollution… into management decisions’. In the UK, following amendments to the UK Companies Act (November 2006)⁴, quoted companies must now refer in their business reviews to the impact of these risks on the environment, employees, and social and community issues.

The environment is not the only concern, however. For example, individuals are being put under increasing pressure to deliver at work. When accidents happen, corporations are recognising and bearing the associated costs. Last year BP calculated the cost of a single human life lost in the course of its business at £10.5m. But compensatory measures cannot repair environmental damage on a global scale and legislation has its limitations. Proactive businesses therefore need to tackle sustainability concerns before they become problems.

What are companies doing?

CIMA recently commissioned research to find out how companies were dealing with the issue of sustainability. ‘Accounting for sustainable development’ was carried out by Jan Bebbington, Professor of accounting and sustainable development at St Andrews University School of Management's Centre for Social and Environmental Acccounting Research. It revealed that the collection of sustainability-related information is a common starting point. Some companies are measuring, recording and (voluntarily) publishing details of their activities in reports such as corporate social responsibility reviews.

But recording and reporting is by nature retrospective. If sustainability is to become an integral part of business, companies must begin with an assurance that sustainability will not be compromised. As Epstein asserts, ‘to effectively manage risk and improve the resource allocation process, risks must be measured and integrated into return on investment (ROI) calculations’³. With their Sustainability Assessment Model (SAM), finance managers at BP may have found an answer.

Introducing SAM

BP already had a strategic focus on sustainability. Its aim with SAM was to embed sustainability into the corporate agenda at grass roots level, before plans for digging or drilling were even drafted. SAM ‘was seen as potentially providing a mechanism by which sustainable development issues could be articulated in a context that affects operational decisions’⁵.

SAM follows a four-step approach:

• step 1 defines the cost objective (or project under consideration)
• step 2 specifies the scope of the analysis
• step 3 identifies the impacts (economic, resource use, environmental and social)
• step 4 translates these impacts into financial terms.

SAM was first applied on an oil and gas field development project. It was decided that SAM would operate ‘cradle to grave’, tracking the project’s sustainable development impacts over its full life-cycle. It included tracking the following project elements:

• exploration drilling
• design, construction, installation and commissioning of required apparatus
• oil and gas production
• platform decommissioning
• oil/gas refining
• manufacture of products from oil and gas
• eventual product use.

To keep the exercise manageable, no more than 25 impacts were considered. The criterion for choosing them was simply which were likely to be the most significant.

The final, and arguably most difficult, step is to translate impacts into an amount of money. SAM uses a monetary metric as it has most influence on those making project evaluation decisions. Other common metrics are also possible, notably energy- or land-based measures.

Calculating using land

Land is an alternative tool for sustainability evaluation, in terms of space appropriated for particular uses. Usually, this is expressed as an ecological ‘footprint’ which indicates how much land is required to support a person, city or country. It is a powerful common currency, because land is a finite resource. Measuring lifestyles in this manner also highlights inequalities in land appropriations. The ecological footprint also shows the extent to which the current ecological capacity of the planet is being exhausted.

SAM was designed for transformative events, for example, the development and use of an oil and gas field. A natural resource is transformed into economic benefits (for the firm extracting and selling it) and social benefits (in the form of mobility, heating and associated products). Social costs (including, for example, road deaths and congestion costs associated with the product use) and environmental costs (such as global warming from combustion of fossil fuel) also occur. 

Bringing the flows together

The modelling of transformations and the identification of significant flows in that process is only the starting point of the SAM analysis. By converting the disparate flows into financial terms, they may be plotted on a graph. This produces the SAM ‘signature’ for a project.

Figure 1: A SAM signature for a typical oil and gas field development

All of the bars above the horizontal line in Figure 1 represent a benefit for a capital sub-category. All bars below the line represent a disbenefit for a capital sub-category, measured in monetary terms. The various colours in each bar represent one element within each sub-category.

For example, the colour blocks of the social bar represent positive elements, such as mobility and heating services, as well as the economic impact of jobs. The coloured blocks within the environmental bar represent negative elements, mainly the damage created by emissions from combusting oil and gas.

The transformative process of the project is thus described by its diagrammatic signature. In this case, financial and social benefits are obtained at the expense of environmental and resource usage costs. The economic bar shows that the issues are reflected, over time, in the financial accounts of BP, and ultimately, shareholder returns.

Major benefits

The economic benefit is usually the only visible account of an oil and gas field development for the developing organisation. The signature, however, draws out the positive and negative externalities that arise over the project’s full lifecycle. In addition, the major benefits and disbenefits (represented in the social and environmental sub-categories) arise after the oil and gas are extracted. They are thus beyond the direct control of the protagonist organisation and that of any one group in society.

In the example illustrated, three aspects of the signature dominate all others:

• the use of oil and gas resources - the grey shading under resource use
• air pollution impacts of combusting oil and gas - the blue shading under environmental impact
• the benefits of products such as mobility and heating - the yellow shading under social impacts.

Sustainability is often defined as requiring ‘constancy of capital stock’ (Gray and Bebbington, 2001, p306 quoting David Pearce, an influential UK economist). The concept behind the SAM closely mirrors this constancy of capital focus.

Is it sustainable?

Deciding if a particular SAM signature represents a sustainable project, therefore, depends on the extent to which the capital sub-categories can be combined and/or substituted. There are many different views on this matter.

If all capital is assumed to be substitutable and if the sum of all elements of the SAM signature is positive, then the development could be said to be sustainable. However, it is usually assumed that critical capital cannot be substituted. If this approach were taken, then a project could not be deemed sustainable if it resulted in loss of critical capital.

A different position would be to allow substitution between elements within a capital sub-category but not to allow substitution between sub-categories. A project could be said to be sustainable if every sub-category had a net positive impact and if there was no loss in critical capital (however defined). Under such a rule, for example, road deaths could be tolerated, given sufficient benefits arising from mobility.

Alternatively, it could be argued that no negative moves in capital could be tolerated (regardless of any benefits in a capital category) if a project was to be described as sustainable. A particular strength of SAM is that it separates the modelling of impacts and the evaluation of whether or not a project could be described as sustainable. The signature can therefore be used as a basis for discussion.

The search for a single figure

Let’s assume that a project must have all elements in the positive to be sustainable but that positive and negatives in a capital category can be tolerated. It is therefore possible to collapse all aspects down to a single figure: an index of the SAM - termed a SAMi.

This may be calculated by taking the sum of all categories (+ economic – resource – environmental + social) and dividing this by the absolute sum of all elements. In this way the net positive benefit as a percentage of total impact (both positive and negative) could be gauged. It could be said that the nearer this figure is to 100% the more sustainable it is. The SAMi in Figure 1 is approximately 25% of the way towards a sustainable project.

There are pros and cons for this approach. If several SAMs were being compared and ranked, then developing a single numerical representation of the outcome of the SAM may be useful. The relative sustainability of various projects could then be gauged, providing that the broad relationships between the numbers were not materially wrong.

With many organisations seeking to explain how they contribute to sustainability, BP’s SAM may prove a useful tool for incorporating these concerns into internal decision making. At the very least it has got companies thinking about sustainability.

Putting sustainability on the agenda

What now? Two important things need to happen:

• organisations should be encouraged to experiment with and develop their own sustainability evaluation methods
• knowledge should be disseminated, since there is much that organisations can learn from each other.

Using tools such as SAM is a potentially powerful way of putting sustainability on the corporate agenda.

 

This article is based on the results of CIMA-funded research, ‘Accounting for sustainability’, by Jan Bebbington.

1. Stern Review on the Economics of Climate Change, HM Treasury, October 2007

2. Kyoto Protocol 

3. ‘Integrating social and political risk into management decision-making’, (published jointly by the Society of Management Accountants of Canada and the American Institute of Certified Public Accountants)

4. The Companies Act: an overview

5. Jan Bebbington, ‘Accounting for sustainability’, CIMA

 

A CIMA Mastercourse 'Sustainability: the business case' will take place on 2 March 2007.

January 2007