Should We Measure CSR

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Corporate Social Responsibility and Environmental Management Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/csr.27

SHOULD WE MEASURE CORPORATE SOCIAL RESPONSIBILITY?

Jouni Korhonen* Faculty of Business Studies, Lahti Polytechnic, Finland This paper is critical towards efforts that try and measure corporate social responsibility (CSR). A critical approach can be important for the development of the theory of the emerging field of corporate social responsibility. A critical and provocative approach can generate discussion and debate. Three main points of critique are presented toward the current efforts in the literature to measure corporate contributions to economic, social and ecological sustainability. First, the use of the concepts of eco-efficiency and eco-efficacy in measuring corporate contributions to sustainability are criticized from the viewpoint of the complementarity relation of human-manufactured capital, natural capital and social sustaining functions. Second, the use of measures that focus on an individual process or an individual company are reconsidered with an approach to industrial and firm networks. Third, the use of the monetary value is reconsidered, e.g. by suggesting an * Correspondence to: Dr Jouni Korhonen, Department of Economics, University of Joensuu, PO Box 111, 80101 Joensuu, Finland. E-mail: [email protected]

Copyright  2003 John Wiley & Sons, Ltd and ERP Environment.

approach based on physical material and energy flows and on a new paradigmatic foundation for social responsibility. The social and ecological indicators illustrating the social and environmental impacts of economic activity and of firms can be combined with economic indicators, but not expressed in monetary terms. Copyright  2003 John Wiley & Sons, Ltd and ERP Environment. Received 20 November 2001 Revised 13 March 2002 Accepted 20 March 2002

INTRODUCTION ustainability is a difficult concept. It is difficult, because one can never really measure it. It is possible only to know if the world has been sustainable and only by looking backward. To determine if it will be sustainable, one must divine the future by looking at a crystal ball (Ehrenfeld, 2000, p. 232).

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Only very few concepts have gained as much attention both in science and the public as the concept of eco-efficiency (Figge

J. KORHONEN and Hahn, 2001). Eco-efficiency and business–environment win–win (Porter and van der Linde, 1996; Walley and Whitehead, 1996) are now commonly discussed in the literature to consider the economics of sustainable development, and in particular whether companies can gain in monetary terms, reduce costs or find new market opportunities through the practice of sustainability. Further, in macrolevel economics and discussion on economic policy, the concept of natural capital, and a monetary value for it, have been defined and measured (Daly, 1996; Costanza et al., 1998). While some authors note that the definition and measurement of the environment and even the social effects of economic activity of private companies by using conventional economics concepts such as capital, efficiency and the monetary value is very difficult and always incomplete, but still necessary for communicating the ecological and social information to decision-making, others simply argue that this is the only way to go to get something done. Within this second perspective, the arguments seem to indicate that, indeed, it is possible to put a value on nature and on the social world in which economic subsystems are embedded. It is sometimes argued that eco-efficiency can reduce the environmental burden of economic activity, even of economic growth. (This point is discussed further later in the paper.) This paper focuses on the existing discussion on the measurement of corporate contributions to economic, social and ecological sustainability. A critical approach is adopted, in which recent arguments in the literature on measuring the contribution of private firms to sustainability (e.g. Karvonen, 2001; Figge and Hahn, 2001) are discussed. The paper presents three main points of critique toward the current discussion. First, the use of the concepts of eco-efficiency and eco-efficacy as a measure of corporate contribution to sustainability are reconsidered and a discussion on substitutability versus complementarity of human-manufactured capital, natural capital and social sustaining functions is presented as Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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an alternative. Second, the single firm or a process as a focus of measurement is challenged with a perspective on environmental networks. Third, the monetary value as a basis in the measurement of corporate contribution to sustainability is criticized. An alternative position is adopted that includes a material and energy flow approach to the environmental dimension and an approach that reconsiders the dominant business paradigm in the case of the social dimension of sustainable development. It is suggested that information on the ecological and social impacts of companies needs to be combined with economic monetary indicators, but not expressed in monetary terms. The paper starts with a brief introduction to eco-efficiency and business–environment win–win discussion. It continues and concludes with the three areas of critique related to measurement of the contribution of private companies to sustainability.

BUSINESS–ENVIRONMENT WIN–WIN AND ECO-EFFICIENCY Eco-efficiency (Figge and Hahn, 2001) and the business–environment win–win notion (Porter and van der Linde, 1996; Walley and Whitehead, 1996) have gained and are gaining increasing attention in the literature on sustainable development, environmental and ecological economics and business environmental strategy. Some authors interpret economic growth that has simultaneously resulted in more efficient ways to utilize natural resources or the natural ecosystem services offered to human economic systems by nature, such as the waste and emission binding capacity, as evidence of a win–win situation (Karvonen, 2001). In other words, when the same amount of product output can be produced with less natural resource inputs and less waste and emission output than before, the eco-efficiency has increased. Some interpret this to mean that nature and the business are benefiting simultaneously. Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? Accordingly, then, the environmental gains of the win–win and eco-efficiency position are possible if production processes use less natural raw material and virgin energy inputs and produce less waste and emissions outputs. The economic gains of the win–win position are possible when less material input implies reduced raw material and energy costs, e.g. transportation costs, or reduced costs of imported fuels. Correspondingly, waste management costs and emission control costs can be reduced through successful industrial or corporate environmental management. Financial companies, banks or investors can choose their investment focus by applying some environmental management criteria. Companies can perhaps enhance their funding in this way. The implementation of measures that are required in international and national environmental legislation can present costs to companies. In this respect, those actors that are proactive and plan ahead can reduce the costs resulting from legislation, and possibly increase their competitiveness. Further, also the green market potential and the green image can have positive implications for company competitive ability according to the win–win view. In the following parts of the paper, we shall focus on some of the recent developments in the literature that have been suggested to be used to study the company environmental management, the win–win situation, ecoefficiency and corporate contribution to sustainability as well as corporate social responsibility. We shall argue that sustainable development is very difficult to measure. There is a risk that the use of the concepts of eco-efficiency and win–win can hinder the true contribution of business to ecological sustainability. Equally difficult is the measurement and quantification of those effects that are more within the social dimension of sustainable development, now commonly understood as a concept that carries with itself economic, ecological and social dimensions. We feel that a critical approach toward the measurement of corporate contribution Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

to sustainability can be very important for the development of the still emerging fields of corporate social responsibility and corporate environmental management. The measurement part is usually the core of the initial review or the eventual audit, and therefore also the basis of continuous improvement of targets, goals and action proposals defined in the quality or environmental management system of a firm. The critical approach toward sustainability measures may also contribute to the development of tools and instruments in ecological and environmental economics that are applied in environmental policy planning, implementation and evaluation.

DIFFICULTY IN MEASURING CORPORATE SUSTAINABILITY This part of the paper considers some of the recent developments in measuring corporate contributions to sustainability in the literature, i.e. the contribution that private companies can make to sustainable development including economic, social and ecological dimensions. The ‘sustainable value-added’ notion and business–environment win–win scenario are discussed. We shall present a critique toward the use of the sustainable value-added concept, eco-efficiency and eco-efficacy by focusing on complementarity versus substitutability of human manufactured capital (HMC), natural capital (NC) and social sustaining functions (SSFs). In a general sense and for the purposes of this paper’s argument, these forms of capital can be understood as follows. HMC is produced by man and includes technology, machines and infrastructure. NC includes natural capital stocks, both renewable and nonrenewable natural resources as well as those services that the stocks yield for human economic systems such as waste and emission binding and assimilation capacity, flood or climate control, pollination etc (see Daly, 1996; Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN Costanza and Daly, 1992). SSFs include intimacy, ease of emotional stress, caring, nurturing, child rearing, social bonding, community ties, gardening or those services offered to the economic production process and economic systems by the household economic actors or by the non-paid work of women (see O’Hara, 1997). The sustainable value added, the rebound effect and the Jevons paradox For measuring corporate contributions to sustainability, the sustainable value-added concept based on a monetary value of economic, ecological and social effects of business has been used (Figge and Hahn, 2001). Four different categories of corporate contribution to sustainability have been identified: efficiencyenhancing contribution without compensation (i), efficiency enhancing with compensation (ii), efficacy enhancing without compensation (iii) and efficacy enhancing with compensation (iv) (Figge and Hahn, 2001). The first two measures can be considered together here, because they allow the use of the concept of eco-efficiency. Therefore, they disregard the Jevons paradox (Mayumi et al., 1998; Jevons, 1990) and the rebound effect (Berkhout et al., 2000), both of which are examples of environmental gains achieved with efficiency that are more than offset by economic growth, consumption or demand. If the same amount of products can be produced with less energy or with fewer virgin resources than before, the production costs can decline. Eventually, this can lead to reduced prices of final products. This can boost demand and consumption. If the economic growth exceeds the gains achieved with eco-efficiency, then the absolute amount of energy or virgin resources used will increase rather than remain the same or decrease as, unfortunately, sometimes claimed by the ecoefficiency advocates. A well known example is more efficient cars and reduced driving costs that increase the absolute amount of mileage Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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driven, and so eventually, also energy use and emissions. Reduced prices of a certain good can also increase the purchasing power of customers that will be spent on some other products, possibly on energy or raw material intensive products. Figge and Hahn (2001) acknowledge the negative growth effect on sustainability and propose the concept of eco-efficacy with or without compensation as a measure of corporate contribution to sustainability. It includes economic, social and ecological dimensions and can be expressed in monetary terms. Ecoefficacy-enhancing contribution to sustainability without compensation happens when the absolute amount of virgin resources or energy that are used decreases through application of corporate environmental management. In addition, the social-efficacy-enhancing contribution is achieved if the social effects (if taken as negative, e.g. accidents, child labour, reduction of equity, disturbances of community etc) will decrease. In other words, increases in social as well as in environmental efficiency here must exceed the negative effect of economic growth on each of these variables, and the absolute effects on social and environmental variables decrease. To put it another way, social efficiency is so strong that increased economic performance achieved through growth still reduces the absolute social impacts when compared with a benchmark, e.g. the time before the growth. Similarly, the overall environmental impact is reduced through eco-efficiency that exceeds the negative growth effect. For example, a company is using less of natural resources than before although its economy has been growing. If the difficulties in measuring social and environmental effects, not least when using a monetary value, or the actual concept of sustainable development and difficulties in its definition, are relaxed, then it seems relatively straightforward that efficacy-enhancing contribution without compensation (compensation discussed next, below) truly contributes to sustainable development. It can mean that Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? negative environmental and social effects are reduced while the company economic performance improves. In fact, efficacy-enhancing contribution without compensation seems to be the only measure proposed in the sustainable value-added concept that would be in tune with the principles of sustainability, or perhaps put more adequately, with the principles of the direction away from unsustainability. The business may indeed contribute to sustainability if it achieves improvements in its economic performance while simultaneously reducing its use of natural capital and reducing its negative social impacts. The difficulties in the use of a monetary value will be discussed later on in this paper. It will be argued that the use of a monetary value can risk sustainability also in those cases which follow the criteria of efficacyenhancing contribution without compensation. We shall also reflect on those questions that relate to the definition of the concept of sustainability, e.g. can the use of non-renewables and the ‘external-carbon’-producing activities by economic actors ever be sustainable, if the goal is to sustain societal development forever and adapt it to the development of the larger ecosystem. Efficacy-enhancing contribution to sustainability with compensation has also been presented as a potential measure of corporate contribution to sustainability (Figge and Hahn, 2001). Here the key point of our critique relates to the notion or condition of compensation. With a monetary value, it is argued that companies can ‘buy’ negative social or environmental effects that the growth of the economic dimension of sustainability has created. If environmental effects are reduced more than the social effects increase, then the ‘extra’ environmental gains can be used to buy the bad social effects. In case of company economic growth, it is argued then that if the overall combined negative effects to environment and social variables are reduced, the compensation has resulted in efficacy-enhancing contribution to sustainability. Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

The efficacy-enhancing contribution to sustainability with compensation has been achieved when the social and eco-efficiency, when considered together and with a monetary value, exceed the negative growth effect to sustainable development. In other words, the condition toward the direction of sustainable development that can be presented as simultaneous improvement in company performance in all three dimensions, economic, environmental and social (Figge and Hahn, 2001) has been achieved. Economic growth of the company has been achieved. The negative social effects, for example, may increase, but these can be compensated if environmental effects decrease more than the social effects increase. The absolute amount of bad social and environmental impact together has decreased although the company has experienced economic growth. Capital substitutability versus capital complementarity Here, it can be important to look at the issue of compensation more carefully. The precondition of compensation is the monetary value and also the substitutability between human-manufactured capital (HMC), natural capital (NC) and the social sustaining functions (SSFs). For the purpose of this paper, we adopt a general definition of HMC, NC and SSFs as above. The definitions have been discussed more thoroughly elsewhere (Daly, 1996; Costanza and Daly, 1992, Wackernagel and Rees, 1997; O’Hara, 1997). If one allows compensation between these different forms of capital, or between SSFs and NC, then one sees all of these as each other’s substitutes. If factors of production are substitutes, then there can be no limiting factor (Daly, 1996), when one factor can approach zero if substituted and compensated by an increase in another, and production output can still be maintained or increased. Karvonen (2001, p. 74) notes that ‘Substitution situations arise when one capital is increased at Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN the cost of decreasing another type of capital, i.e. win–lose or lose–win situations’ and ‘. . . increasing production capacity with existing technology will increase environmental burden; a case of manufactured capital substituting for natural’. She takes these examples as evidence that show that the Daly position (Daly, 1996) on capital complementarity is sometimes not true, and in fact, HMC can sometimes serve to substitute for natural capital in an economic production process (Karvonen, 2001, pp. 71, 85). We argue that the difficulty in substitution, and therefore, in compensation, is that HMC, NC and SSFs are fundamentally, and to a very large extent, complements instead of substitutes. What good is a saw-mill without the forest (Daly, 1996)? Similarly, although rarely accounted for in monetary terms or in markets, every worker needs a place to rest, to receive intimacy and caring services or enjoy social bonding and to ease emotional stress to be able to work in the factory again next morning. The SSFs are also an essential part of an economic production process. These forms of household and community SSFs cannot always be substituted with a monetary value that has been achieved with improvements in the company environmental or eco-efficiency or with HMC, but the SSFs can be and are affected negatively by various forms of modern economic activity, e.g. growth, international trade and globalization. Consider that even eco-efficiency is sometimes adopted as evidence of substitutability of HMC for NC (Karvonen, 2001). It is argued that reduction in emissions and wastes or in resource use shows how technology or green technology has substituted for NC. Therefore, aggregation across qualitatively different roles in an economic production process is allowed. In Daly (1996), the role of HMC is that of an agent or efficient cause of production while NC is the material cause of production or the resource flow undergoing qualitative transformation into a product output in an economic production process by HMC and labour (Daly, Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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1996; Costanza et al., 1997). Quantitative aggregation across qualitatively different roles is impossible (or very difficult). Therefore, we do need both fuels as well as a power plant to produce electricity and heat. Because efficiency is the ratio of output to input and capital is the quantity of input (Daly, 1996, p. 78), best available techniques (BAT), cleaner production tools (CP) or pollution prevention (P2) that can reduce the amount of virgin resources needed or the amount of wastes and emissions produced are not evidence of HMC substituting for NC. HMC needs NC to function, hence the condition of complementarity. This argument for the complementarity position is supported with many commonsense examples now carefully described in ecological economics literature, e.g. the cook and the eggs are complements when making a cake and the fishing boat is no good without the fishing population in the sea (Daly, 1997, 1996). Consider that through CP or BAT, for example, a new incineration technique can be applied that enables a shift from fossil fuels to biomass or waste fuels. This is important for sustainable development. Approximately 80% of the world energy production relies on emission intensive and non-renewable and often imported fossil fuels. However, this is not evidence of substitutability. Rather, this shows how a quantity of one resource input flow substitutes for a quantity of another resource input flow, not a physical quantity of HMC or machines as input substituting for the same amount of physical quantity of natural resource inputs. Following Daly (1996, 1997), it can be argued that we need flour, eggs and sugar, not only a good cook and a modern kitchen, to make or bake a cake. Different forms of capital are each other’s complements. They have a qualitatively different role for economic development and economic activity or for the economic production process. You cannot have one without the other. Because of this, the monetary compensation, which allows for quantitative substitution across qualitative different roles of HMC, NC and SSFs, can be risky Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? for corporate environmental management, corporate social responsibility and, eventually, also in terms of macro-level sustainable development. Because of this, measuring corporate contributions to sustainable development by allowing compensation is risky.

FIRM VERSUS NETWORK OF FIRMS To the author’s knowledge, eco-efficiency and eco-efficacy, the win–win scenario and the sustainable value added as well as most of the other approaches to measure corporate sustainability or to study company environmental performance focus usually on an individual company, process or product. It is argued in this paper that while such a focus can present important and detailed information, it can also increase the risk of problem displacement between life cycles, processes and companies. Product flows, material and energy flows and the social impacts of a product life cycle affect or are affected by many different social actors crossing product, process, firm, regional and national boundaries and borders. Hence, included in the levels of analysis that are used in the measurement of corporate contributions to sustainability should be a network approach on a system of firms. Isolated or fragmented approaches to environmental policy or corporate environmental management have sometimes led to problem shifting or problem displacement rather than problem solving (J¨anicke, 1990; J¨anicke and Weidner, 1995). The ‘environmental bad’ has been recycled or shifted between different environmental media (Ayres, 1994) from production to end-consumption (Anderberg, 1998; Rejeski, 1997) or wastes have been transformed from one form to another (Korhonen, 2000a). To tackle such tendencies, it can be beneficial to focus on a network of firms, on the different processes in the network and on its material and energy and product flows as a whole. This, of course, increases the scope of the study and widens the system boundaries, and hence is Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

more difficult. However, the network or the systems perspective is still important to note and adopt as the basic vision or the goal on top toward which to strive. The more detailed and isolated approaches can then, perhaps, serve as parts of the systems perspective, or as tools that are used to achieve reductions in terms of the environmental or social burden of the system as a whole. However, it is important to note that, at times, the network approach can support different policy and management goals than a focus on an isolated firm. This is not to claim that one is always better than the other. The network approach can be somewhat contradictory to eco-efficiency or eco-efficacy of an individual actor in the network. For example, there may be cases in which it can be beneficial to let some individual firms generate large quantities of wastes. This can serve the purpose of reducing the environmental burden from the network system as a whole. In particular, this is the case if these wastes are the key to the continued operation of the environmental management cooperation of the network system as a whole. This might obviously be in contrast with an individual firm’s environmental management system (EMS). The EU Eco-Management and Auditing Scheme and the ISO 14001 standard still mainly set targets and goals by considering the firm environmental effects, not the entire and diverse firm network of which it can be a part. Consider that a certain network relies to a large extent on imported, non-renewable and emission intensive fossil fuels. The only possible solution to substitute for these fuels could then be wood wastes or landfill wastes that can be used for fuels and for biogas-based energy production. For the environmental benefit of a network system as a whole, the wastes produced by certain individual actors can be important as they serve as fuels and substitute for fossil fuels and allow the interdependencies and cooperation in the system as a whole to Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN continue and sustain itself. The individual ecoefficiency or eco-efficacy, or both, may have to be sacrificed for the common gains in the network. Correspondingly, the environmental image of a single actor may suffer although the environmental burden from the network of firms as a whole of which this individual firm is a part of would be reduced. The image could of course be boosted with improved communication of environmental information, e.g. through a special environmental report that is prepared for a network of firms, instead only for an individual participant of the network. To the author’s knowledge, environmental reporting or eco-balances that are used in the reports are developed and used focusing on a single company. Also in EMAS, the communication is mainly required to show the environmental effects of a firm. The preparation of an extensive network report would naturally require much time and resources and the data gathering would be difficult. In addition, there might be difficulties in agreeing on which of the individual actors should actually be responsible for carrying out this task. It is obvious that the kind of cooperation suggested with environmental networks of firms, e.g. local recycling networks, is very difficult to organize and achieve, e.g. because of conflicting interests of the many participants, but it seems also obvious that, usually, for controlling and reducing the environmental burden of industrial activity and for avoiding or reducing the risks of problem displacement between firms, processes and products, the network approach should be taken into account. This is not to say that it can substitute for an individual management system of a company; rather these two approaches could be taken as complementary. The environmental burden of a regional industrial system as a whole can often be more important as a focus point of policy and management than wastes and emissions of an individual actor. Usually the waste quantities of a system or network as a whole are much larger than those at an individual network Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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participant. However, it must be remembered that waste and emission flows are qualitatively different. Therefore, they cause different environmental effects. Sometimes even a very small quantity can be much more harmful than considerably larger quantities of some form of waste that is easy to handle and contains no or less poisonous substances, heavy metals, e.g. cadmium etc.

FROM MONETARY VALUATION TO STUDYING THE MATERIAL AND ENERGY FLOWS AND THE DOMINANT SOCIAL PARADIGM On monetary valuation of natural capital and social sustaining functions It can be argued that, in fact, all those methods that rely on using the monetary value to measure sustainability have risks embedded in them, although obviously seemingly useful for the purposes of creating a language that policy and business decision-makers understand and listen to. We would agree on the position adopted by Rennings and Wiggering (1997) in which they suggest that physical material and energy flow indicators and economic monetary indicators are complementary in policy decision-making and implementation. In this view, ecological indicators should be used for measuring environmental effects, resource use and waste and emission generation, and these should not be transformed to economic monetary indicators. However, for the policy planning and implementation, and for that matter also for corporate environmental management decision-making and implementation, economic monetary indicators are also needed. Economic monetary indicators are required for measuring the damage costs that result, e.g., from losing some form of natural capital. Deforestation could present such a damage cost for a national forest industry. However, this is not the same as the total social value of the forest and its biodiversity. Furthermore, Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? monetary indicators are needed in order to illustrate how much it costs to implement a certain policy program or environmental legislation or construct an environmental management system for a company. Pollution abatement technology, waste processing or greener incineration techniques mean investments and these have a cost that can be measured by using monetary information. Again, this is not to suggest that the monetary value would somehow show the total value of a certain biological habitat that the technology is attempting to preserve, but it is equally obvious that these monetary effects of environmental policy and management must be taken into account to reach a societal consensus. Ecological indicators can be used together with monetary indicators, but the ecological indicators should not be expressed in monetary units. Even with an efficacy-enhancing contribution to sustainability without compensation in the model of Figge and Hahn, the contribution to sustainability cannot secure ecological sustainability or social sustainability if the contribution is measured and defined by relying on a single monetary value as the authors suggest. ‘Sustainable Value Added uses nonmonetary environmental and social information and monetary economic information to translate corporate contributions to sustainability into a monetary indicator’ (Figge and Hahn, 2001, p. 83). This is, because not all ecological scarcities or loss of biodiversity can be taken into account in markets. In many cases, it is very difficult to put a monetary value on natural goods or ecosystem services. Note the ongoing discussion in environmental and ecological economics on contingent valuation methods of willingness to pay (WTP) or willingness to accept (WTA) (see Costanza et al., 1998). Rather, the value of ecosystems as life supporting services seems infinite. Wackernagel and Rees (1997, p. 14) note that putting a monetary value to products of natural capital or ecosystem services ‘. . . convey a sense that nature’s total value is finite, when, in fact, ecological necessity dictates that the total Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

social utility of many forms of natural capital is infinite; without phosynthesis, no life etc’. This view supports the complementarity position in the relation of NC and HMC. Contrary to this, if there exists a one single monetary value for both forms of capital, then this can be interpreted that HMC can substitute for NC. This, in turn, implies that compensation of income for the loss of NC damage costs is possible. According to Rennings and Wiggering (1997, p. 25), the concept of weak sustainability assumes substitution and that, e.g., forest damage can be compensated for by benefits from HMC such as income. Therefore, the substitutability assumption (and assumption of compensation) assumes a monetary value for NC (Rennings and Wiggering, 1997). Correspondingly, the monetary value assumption assumes substitutability. Rennings and Wiggering (1997) note that the concept of strong sustainability denies the degree of substitution that weak sustainability assumes. Therefore, they prefer to use monetary indicators for HMC and ecological or physical indicators for NC. This would keep the possibility of sustainability alive. This implies that even the ‘strongest’ contribution to sustainability in the calculation method of Figge and Hahn, the sustainable value added, which is the efficacy-enhancing contribution without compensation, does not necessarily present evidence of strong sustainability. They use a monetary value to present and communicate information on NC, SSFs and HMC. Even if one does not allow compensation, sustainability contribution is not secured if a monetary indicator is used. The monetary value quantifies and reduces information of the impacts that economic activity causes on nature and on the social world. With a monetary value, one allows for substitution, which is the most important question to be asked if the goal is strong sustainability. Of course, there exist many different kinds of definition and interpretation of the concepts of sustainable development, weak sustainability and strong sustainability. But surely, one Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN agrees that substitutability does not secure sustainability forever, at least not with the present knowledge and information of technological progress, in which there is always a degree of uncertainty (for discussion, see Costanza, 1999). The human economic system is an open and rapidly growing subsystem of the materially closed, finite and non-growing ecosystem. In other words, the risk arises that the use of a single monetary indicator results in incomplete information on company environmental performance. The interventions in nature that are always needed in economic activity may result in effects that reduce corporate sustainability (Ring, 1997). This valuation problem is equally difficult in the case of social effects or corporate social responsibility. How is it possible to value intimacy and love or social bonding and nurturing services offered to economic actors by households, neighbourhoods or by local communities? Putting a monetary value on SSFs can also yield corporate social responsibility programs and management systems that create unwanted results, because of incomplete information. Material and energy flows and a new social responsibility paradigm However, although it is difficult to measure the effects on natural capital and on social capital or on SSFs which are created by economic activity, we can surely know the general direction towards which to develop the economic subsystem in order to enhance its adaptability (and sustainability) to the larger social system and to the life supporting ecosystem, or as some say we can perhaps know what is not sustainable, although we do not agree on the absolute definition of sustainable development. We also agree that something must be done. In case of the social dimension of sustainability, it can be argued that a basic paradigm shift away from individual libertarianism, reductionist notions of knowledge (Ehrenfeld, 2000), competition, mass production and unlimited Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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growth, contractual relations or globalization may have to be considered in order to enhance corporate social responsibility and sustainability in general. The core of corporate social responsibility is that companies view themselves as a part of the larger society and take into account all of the stakeholders, not just shareholders or customers. A company that views its surroundings merely as resources or as sinks for disposal and engages in hard competition with its surroundings, neglecting cooperation, does not seem to fit the ideal of corporate social responsibility. In other words, the basic world view or the paradigm of modernity as well as the modern ideal of a firm seem to work against the philosophy on corporate social responsibility. To improve the understanding of the required adaptability to the society and cooperation with societal stakeholders, it may be possible to draw from different cultures, religions or from arts and sports and consider these as sources of a metaphoric sustainability paradigm. Such sources can provide us with metaphors and conditions that are outside the dominant social paradigm of modernity or of neoclassical economics. Metaphors of diversity, interdependency, cooperation, connectedness and community or locality can be important for the social dimension of sustainability and for corporate social responsibility, for reconsidering the basic paradigm and the world view of western modernity and that of neoclassical economics (Ehrenfeld, 2000; Korhonen, 2001a). These metaphors run counter to competition, mass production, unlimited growth and globalization. For example, cooperation instead of mere outcompetition in a ‘winner takes all’ situation can be important for corporate social responsibility. Corporate social responsibility requires that companies think beyond shareholders and customers. Firms need to take the larger community and all the different stakeholders, from NGOs to cooperation partners, supply chain and the developing countries, into account. The locality metaphor could alert the business Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? to the unhealthy inter-regional dependencies that are disturbing in the modern global market economy and in free trade, particularly from the perspective of the economies in the developing countries. Locality can alert one toward local self-reliance and preservation of local cooperative and participative structures, and community ties for the common good of the local/regional economic system. It is relatively easy to find support for the general argument that cooperation with stakeholders instead of mere competition, as well as preservation of local community instead of mere unequal trade, are important for corporate social responsibility. In the case of ecological sustainability, a source for a model or a paradigm may be found in long-lived or sustainable natural ecosystems (Korhonen, 2001b, Ehrenfeld, 2000). A very general direction toward ecological sustainability can simply be presented as the material and energy flow model of the natural ecosystem. The ecosystem seems to be the only material and energy flow-based system that has been able to sustain itself over long term. Species come and go, but the natural ecosystem as a whole is able to sustain itself, perhaps forever, hence the condition of sustainability. Nature runs on infinite solar energy and has developed material cycles and employed energy cascades between different actors, organisms and in the food chain. Correspondingly, companies could increase their reliance on renewables and on waste material or residual energy to positively contribute to sustainability and to adapt to the natural ecosystem operation. In addition, similarly to diverse food chains, companies could apply local solutions together with other participants in the firm network. For example, diverse waste exchange and utilization relations, material cycles and energy cascades could be developed for a certain local system in interdependency between many different actors to better adapt to the local natural limiting factors and to reduce dependency on imported fossil fuels. The natural material and Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

energy flows provide us with a reference state towards which to strive. For example, similarly to nature, no external carbon should be used in the way economic systems use fossil fuels. The reproduction capacity of the natural ecosystem should be secured in order to maintain its ability to bind carbon dioxide (CO2 ) emissions into its annual growth. It can be argued that it is possible to generally define certain reference states or conditions towards which, e.g., a regional economic system should continuously strive to enhance its ecological sustainability. Such levels could be, for example, the sustainable yield in the use of local forest resources or levels of carbon dioxide emissions that nature can bind and absorb into its annual growth. Rennings and Wiggering (1997) suggest the concept of critical loads. Critical loads and levels are estimates of an exposure below which significant harmful effects on elements of the environment do not occur. Critical loads and levels are defined, e.g., on the basis of discussion to find scientific consensus and on the basis of experiments in laboratories and in the field. The critical loads are physical material and energy flow and ecological indicators as opposed to monetary indicators. They have their basis in the three main sustainable management rules (Daly, 1990, cited by Rennings and Wiggering, 1997, p. 26). (i) Harvest rates of renewable resources should not exceed regeneration rates. (ii) Waste emissions should not exceed the relevant assimilative capacities of ecosystems. (iii) Non-renewable resources should be exploited in a quasi-sustainable manner by limiting their rate of depletion to the rate of creation of renewable substitutes. Interestingly, all of these rules fit the natural ecosystem metaphor and its material and energy flow model (Korhonen et al., 2001). Nature does not exceed its reproduction rates. Nature can assimilate the carbon dioxide (CO2 ) Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN emissions released from natural drain. Nature does not use non-renewable resources in a way that economic and industrial systems do. However, it must be noted that our knowledge of the ecosystem operation, even if presented in non-monetary physical terms of material and energy flows as argued for in this paper, is always based on uncertainty and incomplete information, e.g. on ecosystem biodiversity or the species interdependency. It must be noted that such physical material and energy flow measures as ecological footprint (EF, Wackernagel and Rees, 1997) have been criticized, because they aggregate and sum qualitatively different material and energy flows with each other (van den Bergh and Verbruggen, 1999). This problem holds also for material flow models (MFM) or life cycle assessment (LCA). For example, a small quantity of a certain toxic or poisonous flow or certain heavy metals, although in small quantities, may be more harmful to nature than large quantities of certain other material flows. Therefore, if for example calculating one single indicator, although in physical terms of quantity or weight, vital information may be lost and unsustainable decisions and management systems may be supported. Because of uncertainty, precautionary policies and business strategies must be adopted to enhance ecological sustainability.

CONCLUSION AND DISCUSSION Welford has noted that ‘There exists a strange and fruitless search for a single definition of sustainable development among people who do not fully understand that we are really talking here of a process rather than a tangible outcome’ (2000, p. 69). It has been argued in this paper that sustainable development as a concept is very difficult to define, and in particular very difficult to measure. ‘True sustainability’, i.e. where a certain system sustains itself over Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

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long term, in fact, forever, can only be considered by looking backwards. In this paper, the recent efforts in the literature to develop approaches and methods to measure the contribution of private companies to sustainability understood as simultaneous improvements in all three dimensions; economic, ecological and social, have been discussed with a critical approach. Three main points of critique were identified. First, the concepts and notions of eco-efficiency and eco-efficacy are difficult in that their use often carries with it the assumption that HMC can substitute for NC. The condition of capital substitutability in the relation of HMC, NC and the SSFs in an economic production process is nearly always impossible. This is because quantitative aggregation or substitution and quantitative compensation across qualitative different roles is impossible. NC, SSFs and HMC are all important parts of economic development and activity, and of an economic production process. Their roles are different from each other, and one is not enough without the other. Second, the focus of corporate environmental management instruments and concepts such as eco-efficiency is often on individual processes or individual firms, while the network approach to environmental management is somewhat neglected. In fact, often an improvement in one process or in one product life cycle can come at the expense of the benefit for a possible network system as a whole. It would seem that there are cases in which the network management approach, although more difficult to organize and manage than that of an individual company, is more important to sustainability, to reduce problem displacement and to control as many product flows, material and energy flows and environmental effects as possible. The network approach and an approach to an individual firm are not each other’s substitutes. Both are needed. Third, the tendency to measure corporate contribution to sustainability in monetary Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

SHOULD WE MEASURE CSR? terms can be important to raise awareness and communicate the importance of the issue to policy makers and company decision-makers, but it will always fail to reflect all scarcities in NC or disturbances in biodiversity. Although sustainability is impossible to define and very difficult to measure and quantify, there exists enough information on the basis of which the general direction toward which economic systems and companies should strive can be known. In other words, perhaps we can know what is not sustainable. For example, we should reduce the use of fossil fuels and respect the sustainable yield when using renewables. Instead of an approach that relies only on a monetary indicator or measure, it is important to use approaches based on physical material and energy flows and combine these with monetary indicators, but it is very risky to transform the physical indicators into a single monetary value. Monetary information will always be needed, e.g. in the case of investment decisions and when calculating costs of environmental management, e.g. waste management costs of companies etc, but this is different from measuring the total value of nature or the effects that companies have on the natural ecosystem. In case of the social dimension of sustainable development or corporate social responsibility, it is also very difficult to measure the social effects in monetary terms. Again, it is important to use some monetary information, e.g. about image costs, to motivate companies to take social responsibility seriously and to act accordingly, but it can be argued that perhaps it is beneficial to try and determine what is not sustainable and what is the overall direction towards which the company policy should strive. What is the basic world view, the underlying philosophy, the vision, the metaphor and the paradigm on which the company and its role as a societal actor are based? Globalization and rapid growth without physical limits and competition seem to be more unsustainable Copyright  2003 John Wiley & Sons, Ltd and ERP Environment

than the metaphors of locality, diversity and cooperation. To identify the basic and underlying implications of the everyday actions of a company for sustainable development, the normal tools and instruments should not only be used in descriptive, positive and analytic or practical ways. Also the more metaphoric, normative and paradigmatic philosophy of the practical metrics and tools needs to be considered. Environmental life cycle assessment (LCA), for example, should not only be understood as a normal practical tool that is to be used to quantify the material and energy flow inventories of products for the control and management of the environmental burden of an individual company or product (Welford, 1998). Rather, the larger picture and implications to global sustainability and to developing nations and future generations should be kept in mind, even in the standard everyday application of LCA. LCA focuses on the entire life of products, and therefore the implications of the product and its life to the developing nations could be considered. The initial raw material extraction may take place in distant third world countries, and these steps in the product’s life can have serious effects on equity, workers’ rights, local community or on other stakeholders. In other words, the sustainable development principle of equity may gain in importance through LCA reflection. Further, as the use phase of the product is also taken into account in the LCA evaluation, the effects of production on future generations can be considered, perhaps more thoroughly than if only remaining in the level of a process in the analysis. The use and the life of certain products as well as their environmental effects extend over company, city, regional and national borders, but also over many decades, perhaps over centuries. What is important is that the links and interdependencies that the practical, positive, analytic and descriptive metrics, measures, tools and instruments have with our underlying world views are studied. The Corp. Soc. Responsib. Environ. Mgmt 10, 25–39 (2003)

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J. KORHONEN paradigmatic, metaphoric and normative foundations of the western culture and economics need to be considered together with the application of the everyday tools and measures. Such a comparison can then be reflected on the concept and the general direction of sustainable development.

ACKNOWLEDGEMENTS The support from the Academy of Finland Regional Industrial Ecosystem Management (RIEM) project and the National Technology Agency Regional Environmental Management System (REMS) project are gladly acknowledged. I would also like to thank ERP Environment for hosting wonderful conferences, in which I have been able to debate with the innovative scholars and the references used in the text.

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Welford R. 1998. Life cycle assessment. In Corporate Environmental Management I, Welford R (ed.). Earthscan: London; 138–147. Welford R. 2000. Corporate Environmental Management 3–Toward Sustainable Development. Earthscan: London.

BIOGRAPHY Dr Jouni Korhonen can be contacted at the University of Joensuu, Department of Economics, P.O. Box 111, 80101 Joensuu, Finland. E-mail: [email protected]

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