Balancing Act

A TRIPLE BOTTOM LINE ANALYSIS OF THE AUSTRALIAN ECONOMY

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Frequently Asked Questions

These questions are grouped into three categories: methodology, indicators and results, and how the report can be used.

Methodology

How are the upstream impacts calculated, or in other words, how are the sectoral supply chains traced accurately?

The generalised input-output analysis framework is based on the input-output (I-O) tables compiled and published by the Australian Bureau of Statistics (ABS). The method by which the ABS constructs Australia’s I-O tables both ensures that the extremely complex interdependencies between sectors are described in a complete and detailed way, and that there is consistency in this description across all sectors. All the upstream linkages (the supply chains) are therefore encapsulated in the I-O tables.

Are there other ways of calculating sectoral TBL performance?

Generalised input-output analysis is the most appropriate methodology for calculating the TBL performance of individual economic sectors. Other methods, such as conventional life-cycle analysis, are not comprehensive because they are affected by so-called “truncation errors” that result from setting an arbitrary finite system boundary.

Is I-O analysis applicable to non-financial issues?

The aim of generalised I-O analysis is to incorporate non-financial indicators into the structure of the economy in a consistent way. As long as impacts from different supply chains can be added up, our generalised I-O analysis is a comprehensive accounting framework that tracks physical, social and financial flows in an identical way, so that all indicators are comparable.

What is a dollar of final consumption?

Final consumption is the “end point” of the economic system. Supplying final consumption is the ultimate function of the industries of an economy. Using final consumption as a reference enables meaningful comparisons to be made on the same basis.

But how can you compare a dollar of final consumption of alumina production with that of hairdressing?

Different sectors clearly perform different functions in the economy. Income from commodity exports helps Australia to offset the cost of its imports. Also, processors and manufacturers in the value-adding chains can capitalise on the sometimes poor environmental and social performance associated with the supply of raw materials from the resource sectors. Nevertheless, using final consumption to explore the links between industrial sectors and their relative impacts can help achieve efficiency improvements by informing socio/economic/environmental policy development. Note that alumina production workers get their hair cut too!

Is there double counting?

No. Each TBL account refers to a particular portion of final demand, and these portions are mutually exclusive and add up to total final demand. In our input-output analysis, total TBL factor use is re-allocated and re-distributed from producers first to industrial consumers of goods and services, and finally to final demanders. At no stage in the input-output calculus do factor flows leak out of the system, or are factor flows added. The factor budgets of all mutually exclusive portions of final demand add up to the national total.

Would there be double counting for companies?

If a company is treated as a final consumer there is double counting. However, in most applications a company’s data will be assessed as being embedded in the national data. This company is then treated as if it were an additional economic sector: it interacts with the rest of the economy just like all existing sectors do. Furthermore, the supply-chain input-output method allows responsibility for each industrial flow to be assigned to both producers and purchasers of intermediate inputs, and can thus be used to evaluate the principle of shared responsibility.

What are the limitations of this analysis?

The methodology is complete in the sense that all impacts upstream from final consumption are included. However, downstream impacts, such as those associated with the use of products by consumers are not yet included (see next question). Impacts which occur overseas and which are embodied in imports are also not assessed in this application, but could be assessed by incorporating data from foreign economies. This is part of the current research of the ISA team at the University of Sydney. The sectoral reports describe the areas where these limitations are most important. The methodology here is also static and cannot provide substantial information on changes that might occur from changes in prices, different tax regimes, etc. However, this is not a limitation for reporting. The current analysis applies at a national level so there is no detail of regional impacts. The techniques are however, applicable at regional level (see question below).

Are downstream impacts assessed?

No. Downstream impacts of sectors (eg the environmental and health impacts of the use and disposal of products) are very important but are outside the scope of the current analysis. The ISA team at the University of Sydney is currently developing a robust methodology for dealing with downstream impacts in a consistent way.

Can the methodology and results be sensibly applied at a sub-national scale to deal with local and regional issues?

The methodologies used for this report are applicable at a regional level. The main requirement is that inter-regional economic data be compiled. The ISA team at the University of Sydney is currently scoping work for expanding the national TBL framework to the State and Territory level.

How would this study be updated and how might this report be used as a benchmark?

Now that the methodology, data sources and understanding are established, a model update is straightforward, and needs only a recent set of input-output and TBL factor data. All these data are compiled regularly by various agencies for a variety of other users. The data is usually collected and compiled in a standardised way, so results would be comparable between different years (also see questions in the indicators section).

Why are there only 10 indicators/factors?

The limited indicator set describes the place of every sector in the full “depth” of the economy. This provides a different perspective and level of understanding to many “shallow” indicators which are each applicable to only a few sectors. In addition, many of the indicators we have chosen are good proxies for other indicators. For example, greenhouse gas emissions and energy use are often useful proxies for air pollutants, such as NOx and SOx, CO, etc. In time the framework will be expanded to include such indicators explicitly.

Why and how were these indicators chosen?

A manageable number of broad indicators were chosen, generally according to the availability of suitable data. These data are taken from various reputable and published sources including national physical accounts from the ABS, federal agency reports (such as energy statistics from ABARE), and from scientific agencies such as CSIRO. Many more indicators will be possible in the future due to the increase in national data collection by such bodies as the ABS. However, greater numbers of factors/indicators per se does not necessarily lead to greater clarity if the depth of analysis is not sufficient to reveal the structure of and connections between sectors.

Can the indicator set be expanded?

Yes, provided reliable data is available at a national level and is amenable to allocation into I-O categories. Better co-ordination between the many government departments and agencies that collect statistical data, better use of information technology to collect data, and a more strategic approach to compiling such data, would all assist this greatly. Such an improved data collection system requires substantial effort (and resources) but the long term benefits to the nation (and to the organisations suffering survey-fatigue!) would be significant.

Why are the indicators grouped into Accounts #1, #2 and #3?

This presentation provides a visual picture of the TBL indicator sets. It was agreed in initial discussions scoping the structure of the report that the grouping of profits/employment/greenhouse was likely to be of most interest, followed by exports/income/water and then imports/government revenue/land disturbance. For ease of presentation, the 10th indicator energy is omitted from some of the representations, although we often delve into it in the comments. This is because on balance, the key policy issue is greenhouse emissions rather than energy input.

How can you describe a sector’s TBL performance properly in five pages?

We see the sectoral description as a summary and starting point, not as definitive or exhaustive. It explains the meaning of the standardised results (intensities, averages, contribution to GDP, supplying sectors, etc) in terms of the key attributes of the sector, and identifies some likely future developments. These sector analyses provide comparable and reproducible numerical results which could provide a basis for more detailed sectoral studies (in fact the ISA team at the University of Sydney is currently conducting more detailed research on several sectors).

Why do you use the economy-wide mean for the factor (rather than for example a median) as a reference point?

The economy-wide mean is used because it is the best way to realistically compare sectors which have very disparate sizes and performance across the different factors. The value of the averages as a definitive benchmark could be debated, but nevertheless they are useful reference points for analysing relative performance.

How do the spider diagrams indicate relative performance?

Positions inside the economy-wide average (indicated by the inner polygon), represent a “better than average” performance against the associated factor. Some factors (specifically land disturbance, water use, primary energy, greenhouse gas emissions, and import penetration) are “negative” in the sense that a reduction in factor usage implies above average performance. The other factors (employment, income, gross operating surplus, exports and government revenue) are “positive” in the sense that a factor increase implies “above average” performance. The scale is logarithmic in order to accommodate indicator ranges that can be many times above and below the economy-wide average.

Can factors be ‘traded off’ within sectors?

Not really: all sectors have above average and below average performance across the 10 factors. TBL accounting and reporting, particularly at this sectoral level, doesn’t set goals, but it can be used to inform political, policy, business, and consumer decision-making. As one of the project reviewers wrote “ … TBL accounting is primarily not a tool to enable trade-off choices to be made, but one to better integrate social, economic, and environmental goals”. Trade-off is perhaps then the wrong phrase. Nevertheless, the results show that in almost every sector there are quite disparate positive and negative results in fields of interest to decision-makers.

Does the report identify sectors that are “sustainable”?

No. Sustainability is an absolute and long-term condition. It is impossible to claim sustainability, even with respect to a single indicator, given our limited understanding of all three areas of the triple bottom line. However, because the indicators are additive (across different levels in the economy) and represent useful proxies for describing hard-to-assess actual conditions or impacts, they are still useful measures of the degree of unsustainability of the economy and sector.

How can you put a dollar value on issues like land disturbance, which are related to biodiversity loss and extinctions?

This report doesn’t put a dollar values on any of the non-financial indicators: these remain in physical units (eg. square metres of land, litres of water, minutes of employment). What it does is reveal the environmental (and financial and social) resources that underpin every dollar in the economy. The methodology uses national I-O tables in monetary terms as the structure of the human economy, and as such connects every physical impact via a monetary intermediary. As a result, important non-market effects, hidden subsidies, non-valued services, resource depletion etc are not included.

Water quality is a critical consideration in Australia. How does this fit in the study?

The water indicator used in this analysis focuses on the volume of mains and self extracted water used. Water quality is not covered by the report. However it would be possible to incorporate reused and recycled water in future work, using similar concepts as contained in the weightings used in the land disturbance indicator. Some of the data to perform this improvement is available now and it is planned to be incorporated into the model. Ground water depletion and contamination are also areas requiring further development.

Use of this report

How might the results in this report be used?

There are many potential applications of the results in this report in the public sector, at an industry level, and down to company level. For example, the results and insights from the report could inform long-term priority setting and policy development at a federal level, such as for industry/productivity studies. They could also be relevant to very high level national policy discussions concerning such issues as carbon risk, water resource allocation and depletion of liquid fossil fuels. Addressing these issues will require considerable dialogue between government departments, industry associations and researchers for the development of satisfactory policy initiatives that are beneficial in both the short and long term. At the time of the completion of this report the authors are engaged in more detailed analyses with several industry bodies.

This analysis is static. How can it be relevant at all for policy instruments?

It is true that this type of analysis cannot be used for forecasting - there are no prices or behavioural variables in the model. However, this is not the motivation for the work. The work is relevant as a documentation of sectoral performance, with these benchmarks and results being very applicable to company reporting (see question below). Short-run policy analyses, looking at the effects of say a 20% change in the price of oil will still be made using such techniques as computable general equilibrium (CGE) modelling. However, these models also have difficulty in dealing with major technological change and price shocks.

How does this report relate to assessing company TBL performance?

There are three key links between this analysis and individual company assessment. First, the report provides sectoral data in a consistent framework, giving companies a reference point against which they may assess their performance. Second, the report reveals the extent and magnitude of the linkages between sectors. This may present new opportunities for management and innovation to improve corporate TBL performance through partnerships with suppliers. Third, the factor multipliers along with a company’s individual characteristics can be combined with their financial accounts to yield full supply chain reporting at a company level.

Would it be difficult for companies to use the report this way?

Our experience of consulting to organisations on boundary-free reporting suggests most of the data required to produce a TBL report for the company can easily be extracted from conventional financial information systems. Since this financial information has to be compiled in any case, only a re-classification into input-output categories is needed for the indicator intensities to be applied, and hence it can be accomplished relatively easily. New software, and standardised accounting data entry into I-O categories, both under development by the ISA group at the University of Sydney, will further expedite the application of the results in this report. Many organisations see the potential for this type of reporting to help them tell a much more complete story of their impacts. At present, the ISA group is undertaking social research on how organisations view the boundary free reporting that the present report can facilitate. It appears that education and awareness raising, along with organisation-wide engagement with the TBL concept, are the major barriers to companies reporting. The technical and data barriers are relatively less important.

How does this report relate to the Global Reporting Initiative (GRI)?

The GRI is a quasi-standard for undertaking TBL audits for companies. As with all audit techniques, a boundary is drawn within which the audit is undertaken. Whilst being able to deal with the specificities of companies, the audit approach cannot capture the full supply chain effects that is possible with the application of the sectoral I-O approach. However, the two approaches fit well together in that a local audit of direct impacts is made (say using the GRI framework), and then the remaining impacts outside the audit boundary are calculated using the I-O derived multipliers. This hybrid method is a logical combination of the approaches and one that produces much more consistent results for companies.

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