July 2022
Mazharul Islam, Sona Analytics
With the onset of the Industrial Revolution and Globalisation the world we live in has evolved rapidly over the past 100 years and even more so over the past 50 years due to technical innovation. Industrialisation has paved the way for goods to be produced at a huge scale, in particular manufacturing has seen an intense boom, with many factories and manufacturing sites at work across the world providing us with almost any item en masse and on time.
However, with Industrialisation sustainability-related issues arises, where raw materials, such as oil, minerals and wood are extracted and used at such huge rates that the socio-environmental cost is skyrocketing, such as the deforestation occurring in the Amazonian rainforest for cattle ranching, oil drilling and soybean production, resulting in as the WWF reports, “…not only the loss of biodiversity and habitat- but also of a decreasing life quality for people.”[1].
Following the COP-26 summit world leaders have a clear focus on the existential threat of Climate Change- high-level carbon emissions arising from unsustainable developments because of Industrialisation are contributing to global warming. Sustainable developments are needed to help minimise our contribution to this.
So what tools are needed to help make these developments? What exactly is Eco Efficiency? And how do Sustainability Analytics and a Sustainability Credit Scoring System fit in this equation?
Eco Efficiency as defined by a study in the Ecological Indicators journal is, “…producing economic outputs with minimal natural resources and environmental degradation.”[2]. It is essentially a dimension of sustainability with a clear purpose; making the most of what we have available on the planet, by creating more goods and services while using less resources and contributing less to negative environmental effects such as waste and pollution.
While there is no direct method of measuring this, there are certain indicators that correlate well with this dimension, namely resource intensities and environmental impact intensities, some which apply across the whole economy and others which differ between sectors. There also exists estimates of this dimension based on many different mathematical models.
One important insight is, how do developing countries, who are most at risk of climate change according to the UN[3], and developed countries, who are less so, perform in terms of their eco-efficiency.
For developed countries, a study in the Applied Sciences journal[4] reveals that out of 17 European countries, majority developed nations, 8 are relatively inefficient at eco-efficiency in comparison with others, however all of them require improvement of some sort, with environmental policy to reducing carbon footprint being a potential solution to increasing this dimension.
For developing countries, a study done by ESCAP of the Northeast Asia subregion[5], of which at least half of the countries are developing, finds that with sector specific indicators, such as, CO2 emissions intensity in the transport industry, there are improvements, however the overall intensity remains high. Also, there are different development paths for each indicator for a given country, as the results are mixed from country to country, with none being perfect in all indicators.
The Sona Sustainability Credit Score System (SSCSS) takes exactly this into account, by having 5 indicators for 6 unique sustainability dimensions, including eco-efficiency, almost every possible link to sustainability can be found. Of these indicators 4 different firm development paths exist, so companies can identify where their current and future sustainability outlook is. The scale may seemingly be at a firm-level as opposed to a regional level for the countries demonstrated above, however, considering that this system is applied to firms across the world, who banks and other financial institutions must make responsible lending decisions towards, the effect becomes regional, and the wider impact becomes clear. The SSCSS is therefore an excellent way forward for economies globally looking for sustainable developments across a whole range of sectors and industries.
[1] “Forests burn, soils dwindle and people suffer”, WWF, https://wwf.panda.org/discover/knowledge_hub/where_we_work/amazon/amazon_threats/
[2] “Eco-efficiency trends in China, 1978–2010: Decoupling environmental pressure from economic growth”, Science Direct,
https://www.sciencedirect.com/science/article/pii/S1470160X12002385
[3] “The Health Effects Of Global Warming: Developing Countries Are The Most Vulnerable”, United Nations, https://www.un.org/en/chronicle/article/health-effects-global-warming-developing-countries-are-most-vulnerable
[4] Eco-Efficiency Assessment for Some European Countries Using Slacks-Based Measure Data Envelopment Analysis, MDPI,
https://www.mdpi.com/2076-3417/10/5/1760
[5] “Eco-efficiency Indicators: Measuring Resource-use Efficiency and the Impact of Economic Activities on the Environment”, United Nations Dep. Of Social and Economic Affairs, https://sustainabledevelopment.un.org/content/documents/785eco.pdf
Keywords: sustainability; risk management; ESG; firm valuation; WACC; sustainable finance; scenarios; sustainability analytics, sustainability credit score system, Sustainable investing, sustainable analytics, analysing sustainability