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The boundary problem

The need for capturing impacts across the entire upstream and downstream supply chain (the boundary problem) is of particular importance and has therefore been noted in the Guidelines of the Global Reporting Initiative (GRI) and Environment Australia, as well as by the World Business Council on Sustainable Development and the Green Environmental Management Initiative.

The Sydney University / CSIRO team can address this boundary problem by taking a TBL Reporting approach that uses the structure of the Australian economic system as described in the national input-output tables. This structure is best depicted as an ever-expanding "tree of interdependence" that starts at a particular economic entity, and stretches across upstream production layers, containing sectors at different production stages linked together by supply chains (see figure). Thus a particular TBL impact associated with a good or a service cascades from primary industries producing raw materials, via secondary (manufacturing) industries into the sector or company that delivers the final product to the consumer.

By taking into account TBL impacts throughout the entire upstream supply chains of companies, the quantitative approach developed by the Sydney University / CSIRO team avoids inconsistencies and loopholes, for example in the following cases:

  1. Demerging and outsourcing: Assume an Australian dairy company "A" that owns the entire production chain, i.e. production of raw milk at the farm, transport logistics from farm to factory and the manufacturing site. This company has significant water usage (mainly at the farm). Assume that the same company A demerges into two companies A1 and A, or outsources to a company A1, with A1 consisting of the farm and transport logistics, while the "new A" is responsible only for dairy manufacturing. In a conventional (on-site only, no upstream impacts) TBL reporting regime, A can improve its TBL (water) performance artificially but significantly, despite the fact that the supply chain and hence the impact of the product processed milk is exactly the same.

  2. Vertical integration: Assume two water suppliers "B" and "B1", where both B and B1 provide water supply and sewage services, but in addition "B1" owns and manages a catchment. In an on-site-only TBL framework, comparisons between these two water suppliers are not valid because - even though they supply the same product - they exhibit different degrees of vertical integration and a different business structure. In this case B1's impact is likely to be higher than B's only because of the additional catchment management activities. In order to provide a fair comparison, the upstream supply chain of B must be taken into account.

  3. Green supply chain: An Australian manufacturing company "C" uses large quantities of packaging materials for their product. The packaging material consists of HDPE and aluminium. Both materials are energy-, greenhouse-gas- and water-intensive. The management of the company decides to replace the packaging material with starch-strengthened biodegradable plastic that is less energy, greenhouse- and water intense. Under conventional (on-site-only) TBL reporting C is not rewarded for this shift to a more sustainable packaging. However, by incorporating supply chain effects the improved environment performance can be quantified.

  4. Risk and liability: A manager of an Australian ethical fund assesses the risk that is posed to a construction company "D" and a water supplier "E" when faced with a carbon tax. The manager decides to incorporate E into the ethical portfolio, because D's carbon emissions from on-site construction machinery are lower than Ds emissions from water treatment processes. However, D may face much higher additional, indirect risks than E, which arise out of price increases of carbon-intensive inputs such as aluminium frames and cement. These risks are ignored in current TBL approaches.

For further information please contact

Dr Arne Geschke
ISA, School of Physics A28
The University of Sydney NSW 2006
+61 (0)2 9036-7505
arne.geschke@sydney.edu.au