9.2 Sustainability and business  (Page 2/11)

Tools for assessing sustainability in business

One useful organizational framework for envisioning different kinds of costs and benefits that businesses encounter is referred to as Total Cost Assessment (TCA). TCA assigns levels of uncertainty to the types of costs associated with various aspects of business activities. Typically five such types are recognized:

• Type I (Direct Costs) – Costs associated with direct operation of the manufacturing or service enterprise that can be readily attributed to a specific activity. Labor, medical, materials, land, and energy are examples of this type of cost.
• Type II (Indirect Costs) – Costs similar to Type I that are not easily assigned to a specific activity and thus are born more generally by the company. These include various kinds of overhead costs, outsourced services and subcontracts (e.g. component subassemblies, janitorial needs), and general support activities such as central offices for purchasing, human resources, etc.
• Type III (Contingent Liability Costs) – These are costs associated with environmental cleanup, non-compliance fines, product or service liability, civil suits, and accidents.
• Type IV (Internal Intangible Costs/Benefits) – These are costs and benefits that accrue to a business that are connected to a variety of intangibles such as worker morale, consumer loyalty, corporate image, and branding of products and services.
• Type V (External Costs) – Put simply, Type V costs are those associated with environmental degradation. They are “external” in the sense that normal financial accounting does not include them; the damage is born in a general sense by society at large. Environmental protection requirements that are enforceable by various laws (see section Government and Laws on the Environment), and mandated market or taxation mechanisms, are policy decisions meant to internalize these costs, forcing the generator of the pollution to either pay for the damage or prevent damage in the first place.

Taken as a whole, these cost/benefit types include all three of the basic elements of the sustainability paradigm. However Type IV and V costs are often difficult to assign a dollar value to; indeed even if this can be done, projecting their value into the future is an uncertain science.

Life cycle assessment (LCA) can also be used to visualize and organize a sustainability model for businesses (See Module Life Cycle Assessment for more information). Recall that LCA grew out of industry’s needs to understand how product manufacturing systems behave, and to develop workable models that could be used to control and optimize material and energy flows, ensure product quality, manage environmental impacts, and minimize costs (these functions are collectively referred to as the supply chain). An expanded use of LCA incorporates the complete product chain    , examining consumer uses, benefits and costs, and the post-consumer disposition of the product. This has led to product conceptualization and development, and in some cases regulatory reform, that incorporate business practices and plans built upon the concept of eco-efficiency    , and extended product/producer responsibility    (EPR). Eco-efficiency is an evolutionary business model in which more goods and services are created with less use of resources, and fewer emissions of waste and pollution. Extended product/producer responsibility involves the creation of financial incentives, and legal disincentives, to encourage manufacturers to make more environmentally friendly products that incorporate end-of-life costs    into product design and business plans. For example one business model that is conducive to EPR is a “lease-and-take-back” model in which products must eventually come back to the manufacturer or retailer, who then must reckon with the best way to minimize end-of-life costs. Remanufacturing, recycling, and reuse of materials are the intended results of EPR, but ordinary disposal, including landfilling or incineration, can also be an option.